Questions  •  of-th«-  fcM/ 


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Silver  Situation 

IN   THE 

United  S^ate 


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QUESTIONS    OF    THE   DAY. 

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RUVfiKSm'  OF  CALMWHNIA 
LOS  AMOJHJ9S 

The  Silver  Situation 


IN   THE 


United  States 


F.  W.  TAUSSIG,  LL.B.,  PH.D. 

PROFESSOR   OF    POLITICAL   ECONOMY    IN    HARVARD    UNIVERSITY,    AUTHOk 

OF    "THE   TARIFF    HISTORY   OF    THE    UNITED   STATES  " 


SECOND  EDITION,  REVISED  AND  ENLARGED 


G.  P.  PUTNAM'S  SONS 

NEW    YORK  LONDON 

27   WEST  TWENTY-THIRD   STREET  24    BEDFORD   STREET,  STRAND 

&\t  ^nicktrbotkcr  |)kss 
1896 


COPYRIGHT,    1893 
BY 

F.  W.  TAUSSIG 


Electrotyped,  Printed,  and  Bound  by 

TSbe  ftnicfeerbochec  press,  mew  ]£>orft 
G  P.  Putnam's  Sons 


NOTE. 


This  paper  was  originally  published  in  January, 
1892,  by  the  American  Economic  Association,  as 
No.  1  of  Volume  VII.  of  its  Publications.  The 
limited  number  of  copies  printed  by  the  Association 
having  been  exhausted,  it  is  now  offered  to  the 
public  in  a  second  and  revised  edition.  In  the 
revision  the  passages  relating  to  the  act  of  1890 
have  been  almost  entirely  re-written,  chiefly  with  a 
view  to  giving  an  account  of  the  instructive  events 
of  the  year  1892.  In  its  present  shape,  the  historical 
account  is  carried  to  the  close  of  that  year. 


F.  W.  TAUSSIG. 


Cambridge,  Mass., 

January,  iSgj. 


2003425 


NOTE   TO   THE   THIRD    EDITION. 


The  present  edition  has  been  enlarged  by  adding 
a  postscript  which  describes  the  course  of  events 
from  1893  to  1896;  the  rest  of  the  book,  with  the 
exception  of  a  page  or  two  at  the  close,  being  left  as 
it  was  published  in  1893. 

No  one  is  more  sensible  than  I  am  of  the  defects 
of  this  little  volume,  and  especially  of  the  need  of 
a  larger  and  fuller  consideration  of  the  general  bime- 
tallic question  than  is  given  in  Part  II.  But  I  am 
still  disposed  to  maintain  the  general  views  set  forth 
in  Part  II.,  even  though  further  discussion  is  needed 
on  some  points,  and  modification  on  others.  A  con- 
tinuous demand  for  the  book  indicates  that  it  serves 
some  useful  purpose,  and  emboldens  me  to  offer  it 
again  to  the  public  in  its  present  enlarged  form. 


F.  W.  TAUSSIG. 


Harvard  University,  Cambridge,  Mass., 
July,  1S96. 


CONTENTS. 


PAGE 

PART  I.— THE  ECONOMIC  SITUATION. 
I.— The  Act  of  1878. 

Provisions  of  the  Act 2 

Silver  Certificates 4 

Causes  of  the  Act 5 

Wherein  Peculiar 6 

Expected  Effects 8 

II.— The  Silver  Circulation. 

Position  of  the  Eastern  Banks II 

Explanation  of  the  Chart 13 

Regular  Autumnal  Increase  of  Silver  Cir- 
culation    14 

Limited  Circulation  for  the  Dollar  Coins. .  .  15 

Four  Periods  in  the  History 17 

III. — 1878-1884. 

First  Coinage  and  Circulation 18 

Large  Certificates  Return  to  the  Treasury. .  .  18 

Upward  Movement  in  i879-'8i 19 

Treasury  Offer  to  Carry  Silver  West  Free..  20 

Prosperous  Conditions  of  this  Time 22 

Consequent  Increase  of  Silver  Circulation.  .  24 

IV.— 1885-1886. 

Crisis  of  May,  1884 25 

Silver  Circulation  Ceases  to  Grow 26 

Explanation  of  this 26 

Treasury  Gold  Receipts  and  Holdings  Shrink  27 

Policy  of  the  Treasury 28 

Effort  to  Get  out  Silver  Dollars 29 

Redemption  of  Public  Debt  Ceases 30 

Hoarding  of  Silver 31 

vii 


Vlii  CONTENTS. 

PACE 

Made  Possible  by  Surplus 32 

Banks  Lend  Gold  to  the  Treasury 32 

Suspension  of  Gold  Payments  Feared 33 

Position  of  the  Greenbacks 34 

The  Gold  Reserve  of  100  Millions 35 

Embarrassment  Ceases  in  1885 37 

V.— 1886-1S90. 

Decline  in  the  Bank-Note  Circulation 38 

In  what  Way  it  Takes  Place 39 

Small  Denominations  of  Silver  Certificates 

Authorized  in  18S6 41 

Revival  of  Business,  1886 42 

Growth  of  Money  in  Circulation,  1878-92.  .  43 

Rate  of  Growth  and  Annual  Increment.  ...  46 
How  much  Additional   Money  the  Growth 

of  the  Country  Calls  for 47 

VI. — The  Act  of  1890. 

Provisions  of  the  Act 49 

Effect  of  the  Price  of  Silver 50 

Amount  of  the  New  Issues 52 

Decline  of  the  Gold  Reserve,  1890-92 55 

Customs  Gold  Receipts  Shrink 56 

Use  of  the  New  Notes  in  Clearing-house 

Transactions 59 

Denominations  of  the  Notes 61 

Crisis  of  1890  and  its  Effects 63 

Redundancy  of  Currency  in  1891 65 

Exports  of  Specie 66 

Efforts  of  the  Treasury  to  Get  Gold 60 

Heavy  Crops  and  Exports  of  the  Fall  of 

1891 67 

Renewed  Redundancy  of  Currency  in  1892.  69 

VII. — General  Conclusions. 

Silver  Issues  have  Followed,  and  not  Caused , 

Rising  Prices 72 

Bearing  of  this  Fart  on  the  Theory  of  Prices  73 

Effects  of  Bank  Deposits 74 


CONTENTS.  IX 

PAGB 

Analogy  of  Silver  Currency  to  Subsidiary 

Coins 75 

Silver  Issues  under  Act  of  1878  not  Exces- 
sive    77 

What  would  have  Happened,  if  No  Silver.  .  78 

VIII. — The  Probable  Future — Free  Coinage. 

Bank-Notes  will  Shrink  for  a  Few  Years  more  79 
Possible  Effects  of  the  Use  of  New  Notes  in 

Bank  Reserves 79 

The  Issues  of  1890  probably  Excessive 81 

A  Gold  Premium  eventually  Probable 81 

How  a  Gold  Premium  maybe  Reached.  ...  83 

No  Contraction  from  a  Gold  Premium 84 

Amount  of  Gold  in  the  Country 85 

Possible  Effects  on  Credit 87 

The    Financial    Position    of   the    Treasury 

Important 87 

The  Sale  of  Bonds  to  Maintain  Gold  Pay- 
ments    88 

A    Permanent  Break-down  can  Come  only 

from  a  Foreign  Drain  of  Gold 88 

Eventual     Rise     of    Prices    under     Silver 

Standard 90 

Probable  Effects  of  Free  Coinage 91 

Early  Break-down  of  Gold  Payments 92 

Slower  Effect  on  Prices 93 

PART  II.— THE  ARGUMENT  FOR  SILVER. 
I. — The  Bimetallist  Argument. 

The  Argument  from  Falling  Prices 96 

The  Burden  of  Debts  Increased 97 

Depression  of  Industry  Alleged 99 

Is  the  Silver  Dollar  Dishonest  ? 101 

Extent  of  the  Fall  in  Prices 102 

II. — The   Effects  ok    Improvements   in   Pro- 
duction. 

The  Fall  in  Prices  at  First  Denied 104 

Then  Ascribed  to  Improvements 105 


CONTENTS. 

PAGE 

The  Appreciation  of  Gold  not  so  Disproved  106 

Real  Bearing  of  Improvements 1 07 

Inverse  Movement  of  Wages  and  Prices  ..  .  108 
Case  Different  from  that  of  a  Simple  Fall 

in    Prices    iog 

Improvements  and  Depression lie 

III. — The  Case  of  the  Farmer. 

Improvements  Affect  Agriculture  differently 

from  Manufactures 113 

Effects  of  Agricultural  Improvements 114 

Causes  of  Agricultural  Depression 116 

Transition  in  Agricultural   Methods 118 

IV. — Silver  and  Gold  as  Standards  of  Value. 

Negative  Reasons  against  Use  of  Silver.  .  .  .  120 

Positive  Reasons.     The  Effect  on  Creditors  121 

The  Increased  Production  of  Silver 122 

Difference  between  Gold  in  1850  and  Sil- 
ver now 123 

Gold  a  Satisfactory  Standard  of  Value.  ...  124 

A  Multiple  Standard  not  Needed 125 

The  Morale  of  Silver  Agitation 126 

V. — The  Expansion  of  the  Currency. 

The  Growth  of  the  Currency 128 

Increase  of  Bank  Deposits 129 

Sufficient  Gold  for  Bank  Reserves 130 

How  to  Secure  Growth  of  Large  Change.  ..  131 

POSTSCRIPT. 

Depression  in  the  Latter  Part  of  1S92. . . . .  134 

Outflow  of  Gold 134 

Drain  of  Gold  Falls  on  the  Treasury 134 

Decline  of  Gold  Reserve 135 

Crisis  of  1893. 136 

How  far  Due  to  Silver  Situation 137 

Repeal  of  Act  of  1890 139 

Transformation   of  some    Treasury   Notes 

into  Silver  Certificates.  . .    140 


CONTENTS.  xi 

i  to  e 
The  Treasury  during  and  after  the  Crisis.      142 

Redundancy  of  the  Currency 143 

National-C^nk  Circulation  Rises  somewhat,   145 

Experts  of  Cold , 146 

Deficit  in  the  Revenue.    . .    147 

Embarrassing  Position  of  the  Treasury. .  . .    147 

Domestic  Withdrawals  of  Gold ...    .    149 

Bond  Sales 150 

Accumiua*:on  of   Legal  Tenders    in    the 

Treasury, 152 

The  Siirifyjion  Unbearable  ,. .   153 

The   Qu:  :.io-    c'  a   Silver  Basis  must  be 

Seta;;. - , , , 154 


THE  SILVER  SITUATION  IN  THE  UNITED 
STATES. 


PART  I. 
THE  ECONOMIC  SITUATION. 


I. 

The  Act  of  1878. 

A  discussion  of  the  silver  situation  in  the  United 
States  divides  itself  naturally  into  two  parts.  On 
the  one  hand,  we  have  the  purely  economic  aspects 
of  the  problem, —  the  working  of  the  silver  legislation, 
its  history,  the  results  that  have  flowed  from  it  in 
the  past  or  may  be  expected  in  the  future.  On  the 
other  hand,  we  have  the  intricate  and  difficult  ques- 
tions of  policy  involved, — the  right  and  wrong  of  the 
legislation,  the  evils  or  benefits  that  have  ensued  and 
may  be  expected,  the  best  course  to  be  followed  in 
view  of  all  the  emergencies  of  the  situation  ;  the 
treatment  of  the  problem  not  only  from  the  eco- 
nomic, but  from  the  wider  social  and  political  point  of 


2  THE   ECONOMIC   SITUATION. 

view.  Here,  as  in  almost  every  subject  which  the 
economist  has  occasion  to  examine,  it  is  advantageous 
to  distinguish  between  these  two  classes  of  considera- 
tions. Accordingly,  the  present  monograph  will 
discuss  them  separately,  undertaking  first  an  exam- 
ination of  the  economic  phenomena,  and  proceeding 
thence  to  a  discussion  of  the  questions  of  policy. 

The  economic  discussion  may  begin  with  an  ac- 
count of  the  act  of  1878,  familiarly  known  as  the 
Bland  Bill.  Although  the  silver  dollar  of  which  the 
coinage  was  resumed  in  1878  dates  back  as  a  coin  to 
the  earlier  days  of  the  Republic,  its  reissue  in  that 
year  marks  a  policy  so  radically  new  that  the  ex- 
perience of  previous  years  throws  practically  no  light 
on  its  working.  The  act  of  1878  '  provided  for  the 
purchase  by  the  government,  each  month,  of  not  less 
than  two  million  dollars'  worth,  and  not  more  than 
four  million  dollars'  worth,  of  silver  bullion,  for  coin- 
age into  silver  dollars  at  the  rate  of  41 2\  grains  of 
standard  silver  (or  37 \\  grains  of  fine  silver)  for  each 
dollar.  The  amount  of  the  purchases,  within  the 
specified  limits,  was  left  to  the  discretion  of  the  Sec- 
retary of  the  Treasury.  As  every  Secretary  of  the 
Treasury,  throughout  the  period  in  which  the  act  was 
in  force,  kept  to  the  minimum  amount,  the  practical 
result  was  a  monthly  purchase  of  two  million  dollars' 
worth  of  silver  bullion. 

1  On  the  general  history,  up  to  and  including  the  act  of  1878,  the 
reader  should  consult  Professor  J.  L.  Laughlin's  History  of  Bimetal- 
lism in  the  United  States  (New  York,  1885). 

The  text  of  the  act  is  conveniently  found  in  Dunbar's  Laws  of  the 
United  States  Relating  to  Currency,  Finance,  and  Banking,  p.  246. 


THE   ACT   OF    1878.  3 

The  act  is  sometimes  described  as  having  called 
for  a  monthly  issue  of  two  million  silver  dollars  ;  but 
this  was  not  the  exact  situation.  The  amount  of 
silver  obtainable  with  two  million  dollars  obviously 
varies  according  to  the  price  of  the  metal  in  terms  of 
the  dollars  with  which  the  purchases  are  made.  In 
February,  1878,  when  the  first  purchases  were  made, 
those  dollars  were  the  inconvertible  United  States 
notes,  or  greenbacks,  worth  something  less  than  their 
face  in  gold.  The  amount  of  silver  bullion  obtain- 
able with  two  million  such  dollars  depended,  on  the 
one  hand,  on  the  price  of  silver  bullion  in  terms  of 
gold,  and  on  the  other  hand  on  the  value  of  the 
dollars  themselves  in  terms  of  gold.  When  specie 
payments  were  resumed,  on  the  first  of  January, 
1879,  and  the  greenbacks  became  redeemable  in  gold, 
the  measure  of  value  in  the  United  States  became 
gold,  and  the  extent  of  the  coinage  of  silver  dollars 
under  the  act  of  1878  became  simply  a  question  of 
how  much  silver  bullion  could  be  bought  with  two 
million  dollars  of  gold.  The  price  of  silver  in  1878 
was,  in  terms  of  gold,  not  far  from  a  dollar  for  an 
ounce  of  standard  silver.  After  1878  it  went  down 
almost  steadily,  and  at  its  lowest,  toward  the  close 
of  the  period  during  which  the  act  of  1878  was  in 
force,  was  barely  above  80  cents  an  ounce.1  The 
silver  dollar  of  412^  grains  contains  less  than  an 
ounce  (480  grains)  of  standard  silver.  The  monthly 
purchase  of  two  million  dollars'  worth  of  silver  there- 

1  I  have  stated  the  price  here,  for  simplicity,  in  terms  of  so  much 
per  ounce  of  standard  silver,/,  e.,  silver  containing  10  per  cent,  of  alloy. 
The  usual  quotation  in  the  United  States  is  per  ounce  of  fine  silver. 


4  THE   ECONOMIC   SITUATION. 

fore  yielded  more  than  two  million  silver  dollars,  the 
amount  being  obviously  greater  as  the  price  of  silver 
went  lower.  On  the  average,  the  monthly  yield  was 
not  far  from  two  and  a  half  millions  of  silver  dollars. 
So  much  each  month,  therefore,  or  thirty  millions  of 
silver  dollars  a  year,  was  roughly  the  addition  to  the 
currency  of  the  community  from  the  act  of  1878. 

An  important  provision  of  the  act  of  1878  was  that 
authorizing  the  issue  of  silver  certificates  against 
the  deposit  of  silver  dollars.  This  authority  was 
limited  at  the  time  to  certificates  in  denominations 
only  of  ten  dollars  and  upward  :  a  restriction  which, 
as  we  shall  see,  proved  to  be  of  great  importance. 
At  the  time  it  does  not  seem  to  have  been  expected 
that  the  silver  certificates  would  enter  directly  into 
the  circulating  medium  ;  we  may  infer  from  the 
restriction  to  large  denominations  that  no  such  ex- 
pectation was  entertained.  But  in  fact  it  has  been 
chiefly  in  the  form  of  certificates  that  the  silver  has 
entered  into  circulation.  These  certificates,  it  is 
true,  arc  not,  like  the  dollars  themselves,  a  legal 
tender  ;  but  they  are  receivable  for  all  public  dues, 
customs  included,  and  they  pass  from  hand  to  hand 
at  least  as  readily  as  the  bulky  pieces  which  they 
represent.  The  government  pays  them  out  directly, 
retaining  an  equal  amount  of  silver  dollars  in  its 
vaults,  and  treating  these  as  a  special  deposit  by  the 
holders  of  the  certificates.  The  quantity  of  actual 
coined  dollars  which  the  community  would  use 
reached  an  early  and  stubborn  limit  ;  but  in  the  form 
of  certificates,  much  wider  play  was  given  to  their 
use.     The  dollars  and  certificates  between  them  con- 


THE   ACT   OF    1878.  5 

stitute  what  we  may  call  the  silver  currency  of  the 
act  of  1878. 

The  passage  of  that  act  was  due  to  causes  easily 
described.  It  was  part  of  the  opposition  to  the 
contraction  of  the  currency  and  the  resumption  of 
specie  payments,  which  forms  the  most  important 
episode  of  our  financial  history  between  1867  and 
1879.  The  resumption  of  specie  payments  had  been 
provided  for  by  the  act  of  1875,  and  was  to  take 
place  on  January  I,  1879.  I"  tne  meanwhile,  the  long- 
continued  depression  which  followed  the  crisis  of 
1873  intensified  the  demand  for  more  money  and 
higher  prices.  That  demand  led  to  the  inflation  bill 
passed  by  both  Houses  of  Congress  in  1874,  and 
killed  by  the  veto  of  President  Grant.  The  same 
feeling  led  to  the  silver  act.  The  great  fall  in  the 
price  of  silver,  beginning  in  1873,  and  showing  itself 
markedly  in  1876,  made  silver,  at  the  old  ratio,  a 
cheaper  currency  than  gold,  and  so  caused  the 
opponents  of  the  return  to  specie  payments  to  prefer 
silver  to  gold,  as  they  preferred  paper  to  either.  No 
doubt  some  additional  force  was  given  to  the  move- 
ment in  favor  of  the  use  of  silver  from  the  desire  of 
the  silver-mining  States  and  their  representatives, 
that  the  price  of  the  metal  should  be  kept  up 
through  a  larger  use  of  it  for  coinage.  But  this 
element,  while  sometimes  prominent  in  the  agitation, 
was  not  then,  as  it  has  not  been  in  more  recent  years, 
of  any  great  importance  by  itself.  The  real  strength 
of  the  agitation  for  the  wider  use  of  silver  as  money 
comes  from  the  conviction  of  large  masses  of  the 
people  that  the  community  has  not  enough  money  : 


6  THE   ECONOMIC   SITUATION. 

a  conviction  which  may  be  fostered  by  the  selfish 
interests  of  mine  owners,  and  doubtless  has  often 
been  based  on  arguments  ludicrously  fallacious,  but 
which  rests,  nevertheless,  on  a  foundation  not  entirely 
selfish,  and  has  some  support  from  economic  reason- 
ing that  deserves  candid  and  attentive  discussion. 

Although  the  specific  measure  passed  in  1878  thus 
rested  on  a  long  train  of  historical  causes,  it  con- 
tained details  that  were  essentially  new,  not  only 
in  our  own  experience,  but  in  that  of  the  world  at 
large.  It  provided  for  the  injection  into  the  cur- 
rency of  a  large  annual  increment  of  overvalued 
coin.  It  did  not  establish  bimetallism  proper ;  for 
the  coinage  of  silver  was  not  free,  but  was  under- 
taken by  the  government  on  its  own  account,  the 
Treasury  reaping  the  profit  which  would  accrue  so 
long  as  the  coins  Were  kept  at  a  higher  value  than 
that  of  the  bullion  put  into  them.  It  did  not  estab- 
lish anything  like  a  subsidiary  coinage  ;  for  the  new 
coins  were  legal  tender  to  an  unlimited  amount,  and 
no  attempt  was  made  to  adjust  their  quantity  to  the 
needs  of  the  community  for  the  convenience  of  small 
change.  It  simply  provided  for  a  regular  mechanical 
addition  of  large  amount  to  the  general  circulating 
medium.  No  precise  experiment  of  this  kind  had 
ever  before  been  tried.  It  is  true  that  Germany  and 
the  countries  of  the  Latin  Union  possess,  in  their 
circulating  medium,  large  quantities  of  overvalued 
thalers  and  five-franc  pieces  which  are  exactly  like 
our  silver  dollars.  They  also  are  legal  tender  with- 
out limit;  their  total  quantity  is  limited;  and  it  is 
only   by  this  limitation   of   the  quantity  that   their 


THE   ACT   OF    1878.  7 

value  is  kept  above  that  of  the  bullion  contained  in 
them.  But  the  thalers  and  francs  in  these  countries 
are  not  new  additions  to  the  currency.  They  are 
remnants  from  an  earlier  period,  when  Germany  had 
a  silver  standard,  and  the  Latin  Union  a  complete 
bimetallic  standard.  No  addition  whatever  to  the 
thalers  is  made  in  Germany  ;  and  if  some  coinage  of 
five-franc  pieces  takes  place  in  France  and  in  other 
countries  of  the  Latin  Union,  the  additions  are 
meant  merely  to  fill  the  place  of  abraded  coins,  to 
provide  for  the  ordinary  losses  from  daily  use,  and 
to  make  any  additions  to  the  supply  which  may  be 
needed  for  convenience  in  making  small  change.  No 
other  country  has  ever  entered  on  an  addition  of 
overvalued  coin  to  its  circulating  medium  having 
the  object  and  extent  of  that  made  by  our  silver  act 
of  1878.  This  characteristic  of  the  measure,  it  need 
hardly  be  said,  was  the  result  not  of  any  deliberate 
intention  to  try  a  new  experiment,  but  of  the  spirit 
of  compromise  which  explains  so  many  anomalies 
in  the  legislation  of  democratic  communities.  The 
silver  act,  as  passed  by  the  House  of  Representatives, 
provided  for  complete  bimetallism, —  for  the  free  and 
unlimited  coinage  of  the  silver  dollar  at  the  old  ratio 
of  16  to  1.  In  the  Senate,  it  was  amended  by  the 
substitution  of  the  provisions  for  a  limited  coinage, 
which  were  finally  enacted.  The  compromise  was 
meant  to  satisfy  both  those  who  objected  to  the 
cheaper  standard  and  those  who  wanted  more 
money  ;  and  it  afforded  a  welcome  escape  to  the 
legislators  who  were  trying  to  satisfy  all  parties.  At 
the  time,   no  one  probably  expected  that  the  meas- 


8  THE   ECONOMIC   SITUATION. 

ure  would  remain  in  force  for  any  great  length  of 
time.  The  conservative  element  hoped  that  it  would 
be  repealed  after  a  short  trial ;  the  inflationists  (for 
by  that  name  they  might,  then  at  least,  fairly  be 
called)  believed  that  it  would  soon  be  superseded  by 
the  free  and  unlimited  coinage  of  silver.  As  it  hap- 
pened, the  act  remained  in  force,  unamended,  and 
indeed  without  very  serious  attempt  at  amendment, 
for  over  twelve  years ;  and  the  measure  which  suc- 
ceeded it  in  1890,  though  different  in  many  details, 
followed  the  same  method  of  forcing  a  large  regular 
injection  of  money  into  the  circulating  medium, 
based  on  silver  purchases  by  the  government. 

On  the  general  principles  which  are  expounded  in 
standard  books  on  political  economy,  the  effects  of 
this  novel  experiment  were  not  difficult  to  predict. 
Each  new  dose  of  silver  money  would  push  out, — 
after  the  resumption  of  specie  payments  had  taken 
place, — an  equivalent  amount  of  gold.  This  process 
would  continue  until  all  the  gold  in  circulation  had 
disappeared.  So  long  as  any  gold  money  was  left  in 
the  country,  gold  and  silver  would  circulate  side  by 
side,  and  the  silver  dollars  would  be  equal  in  value 
to  the  gold  dollars.  After  the  gold  had  disappeared, 
silver  alone  would  be  the  basis  of  the  monetary  sys- 
tem. Prices  would  accommodate  themselves  to  the 
new  measure  of  value,  and  would  become  somewhat 
higher  than  they  had  been  under  the  gold  standard. 
If  thereafter  the  government  still  continued  to  coin 
and  issue  the  annual  increment  of  si)-,  er,  the  effect 
would  be  simply  a  corresponding  outflow  of  gold 
from  the  country. 


THE   ACT   OF    1 878.  9 

Something  of  this  sort  was  probably  expected  at 
the  time  by  most  persons  familiar  with  economic 
reasoning  ;  and  such  doubtless  would  have  been  the 
working  of  the  measure  if  no  complicating  forces 
had  intervened,  and  if  the  effects  of  an  increased 
issue  of  money  had  proved  to  work  themselves  out 
with  that  mechanical  simplicity  which  is  assumed 
in  the  usual  statements  of  the  theory  of  money  and 
of  prices.  But  neither  of  these  conditions  has  been 
fulfilled.  Complicating  forces  have,  in  fact,  inter- 
vened. There  have  been  changes  in  other  parts  of 
the  circulating  medium,  and  great  changes  in  the 
general  economic  conditions  of  the  community, 
which  must  necessarily  have  modified  to  a  great 
extent  the  expected  effects,  even  if  the  second 
assumption,  of  mechanical  simplicity  in  operation, 
had  held  good.  But  this  second  assumption  also  has 
proved  to  need  important  correction.  Our  experience 
under  the  act  of  1878  has  shown  that,  in  this  class  of 
economic  phenomena  as  in  others,  the  working  of 
the  economic  forces  is  far  from  simple.  The  clear- 
cut  fundamental  doctrines,  while  they  remain  true  at 
bottom,  and  while  they  are  confirmed  by  experience 
in  the  long  run,  need  correction  and  qualification 
such  as  experience  alone  can  supply.  For  this 
reason,  the  actual  working  of  the  act  of  1878,  and,  it 
may  be  added  at  once,  that  of  the  act  of  1890,  are 
of  interest  not  only  as  a  matter  of  present  political 
importance,  but  as  a  lesson  of  permanent  instruc- 
tion for  the  economist.  The  sort  of  corrections  of 
accepted  doctrines  which  are  supplied  by  our  expe- 
rience will  be  explained  in  detail  in  due  time;  but  it 


IO  THE   ECONOMIC   SITUATION. 

may  not  be  amiss  to  state  at  the  outset  that  the 
modifications  by  no  means  destroy  the  validity  of 
the  accepted  conclusions.  They  rather  supplement 
them,  and  show  with  what  variations  they  apply 
under  new  conditions.  The  general  theory  of  money, 
as  worked  out  by  Ricardo,  and  expounded  on  his 
lines  by  every  writer  of  note  since  his  time,  remains 
intact ;  but  something  is  added  to  it,  and,  more  par- 
ticularly, the  need  of  care  and  discretion  in  making 
predictions  based  on  it  is  illustrated  to  perfection. 


II. 

The  Silver  Circulation. 

So  much  by  way  of  preface.  Turning  now  to  the 
actual  working  of  the  act  of  1878,  the  first  fact  to  be 
noted  is  the  attitude  of  the  banks  to  the  silver  cur- 
rency, which  was  and  is  a  factor  of  prime  impor- 
tance. From  the  outset,  the  banks,  especially  in  the 
large  cities  of  the  East,  fought  shy  of  the  silver 
money.  They  were  unwilling  to  use  large  quantities 
of  it,  and  still  more  unwilling  to  allow  large  quanti- 
ties to  accumulate  on  their  hands.  This  disposi- 
tion no  doubt  may  be  ascribed  in  part  to  their  close 
connection  with  the  creditor  class,  to  whom  a  lower- 
ing of  the  standard  of  value  must  be  objectionable. 
But  in  good  part  it  is  due  to  causes  of  a  different 
sort.  The  desire  for  a  steady  and  unvarying  basis 
for  credit  transactions  results  naturally  from  the 
conditions  of  the  banker's  business  ;  and  all  trans- 
actions connected  with  foreign  trade  must  of  neces- 
sity rest  on  a  gold  basis.  Not  least  important  is 
the  simple  public-spirited  preference  for  gold  as 
the  better  standard  of  value  in  the  interests  of  the 
community  at  large — a  preference,  to  be  sure,  which 
rests  on  tradition  quite  as  much  as  on  a  clear 
weighing  of  the  merits  of  the  case.  At  all  events,  in 
November,    1878,  shortly    after  the  passage  of    the 


12  THE   ECONOMIC   SITUATION. 

silver  act,  and  immediately  before  the  resumption  of 
specie  payments,  the  banks  of  the  New  York  clear- 
ing-house adopted  a  rule  prohibiting  "  the  payment 
of  balances  [i.  e.,  between  banks  at  the  clearing- 
house] in  silver  certificates  or  silver  dollars,  except 
as  subsidiary  coin  in  small  sums  (say  under  ten  dol- 
lars)." '  In  1882,  Congress  tried  to  break  up  the 
practice  so  established  by  inserting  in  an  act  of 
that  year,  for  extending  the  corporate  existence 
of  national  banks,  a  proviso  that  no  national  bank 
should  be  a  member  of  a  clearing-house  at  which 
silver  certificates  were  not  receivable  in  payment  of 
balances.  The  rule  of  November,  1878,  was  there- 
fore dropped  by  the  New  York  banks.  But  their 
practice  remained  unaltered.  Congress  can  compel 
a  national  bank  to  receive  silver  certificates,  but 
cannot  compel  it  to  offer  them.  The  banks  by  tacit 
consent  refused  to  make  the  tender.  In  fact,  the 
silver  currency  was  not  allowed  to  enter  into  trans- 
actions between  banks. 

The  banks  did  not  "  boycott  "  the  silver  currency, 
as  it  has  sometimes  been  put.  They  received  it  on 
deposit,    and    accepted    it  in  tender  of  debts  when 

1  These  rules  are  printed  in  the  Comptroller's  report,  in  Report  on 
the  Finances  for  1878,  p.  169.  It  is  there  stated  that  the  Boston 
banks  adopted  the  same  rules  ;  but  the  practice  of  the  Boston  banks 
did  not  become  settled  until  after  the  events  of  1885,  to  which  refer- 
ence is  made  below  at  p.  29. 

The  usage  of  the  banks  in  the  West  varies  from  that  of  the  Eastern 
banks.  Philadelphia  follows  the  example  of  New  York  and  Boston 
in  the  refusal  to  use  silver  currency.  But  in  Chicago,  St.  Louis, 
Kansas  City,  and  Denver,  silver  certificates,  and  bank  notes  as  well, 
pass  between  banks  as  freely  as  any  form  of  currency,  though  in  fact 
no  large  amounts  are  used. 


THE   SILVER   CIRCULATION.  1 3 

offered.  But  they  endeavored  to  hold  as  little  of  it 
as  possible.  They  paid  it  out  first  from  the  cash 
flowing  through  their  hands,  and  still  so  pay  it  out. 
If  the  silver  dollars  or  certificates  which  accumulated 
on  their  hands  were  not  carried  off  by  the  calls  for 
cash  from  persons  presenting  checks,  the  excess  was 
got  rid  of  in  another  way.  Both  silver  dollars  and 
certificates  are  receivable  for  all  public  dues,  customs 
included  ;  and  when  they  began  to  accumulate  in  the 
banks,  they  were  turned  over  to  the  Treasury,  chiefly 
through  the  hands  of  importers  and  custom-house 
brokers  who  had  payments  to  make  for  customs 
dues.  The  signal  importance  of  this  attitude  of  the 
banks  will  soon  appear. 

The  history  of  the  working  of  the  silver  currency 
is  most  easily  followed  on  the  chart  appended  to  this 
paper,  which  is  continued  as  nearly  as  may  be  to  the 
present  time,  and  therefore  bears  on  the  act  of  1890 
as  well  as  on  that  of  1878.  The  part  of  the  chart  to 
which  the  reader's  attention  is  chiefly  called  is  the 
dotted  line,  which  begins  at  the  bottom  on  the  left 
hand,  and  ascends  irregularly  but  steadily  upward 
athwart  the  page.  It  indicates  the  amount  of  silver 
currency  (dollars  and  certificates  added  together) 
actually  in  circulation  from  month  to  month.  Above 
it  runs  an  unbroken  line,  almost  straight,  which 
soars  up  the  page  without  a  break,  and  indicates  the 
total  coinage  under  the  act  of  1878.  After  July, 
1890,  this  straight  line  stands  for  the  issues  under  the 
act  of  1890,  which  will  be  described  in  their  place  in 
the  pages  to  follow.  It  will  be  noticed  that  the  rate 
of  increase  is  markedly  greater  in    1890,   in  conse- 


14  THE   ECONOMIC   SITUATION. 

quence  of  the  legislation  of  that  year.  Still  another 
important  line  is  the  broken  one  which  runs  across 
these  two,  and  represents  the  net  amount  of  gold 
held  by  the  United  States  Treasury.  The  fluctua- 
tions which  it  indicates  are  marked,  and  some  of 
them — especially  for  1884-85  and  1890-91 — are  of 
much  significance.  Of  least  importance,  though 
of  interest  as  a  matter  of  curiosity,  is  the  lowest 
line,  of  asterisks,  which  represents  the  amount  of 
actual  silver  dollars  in  the  hands  of  the  public. 

Certain  preliminary  points  suggested  by  this  chart 
may  be  disposed  of,  before  proceeding  to  the  more 
important  general  features  which  it  indicates.  Look- 
ing at  the  line  which  represents  the  amount  of  silver 
currency  in  actual  circulation,  we  observe  a  very 
distinct  increase  in  the  outgo  or  circulation  of  silver 
in  the  latter  half  of  each  year.  That  increase  shows 
itself  regularly,  even  in  years  like  1885,  when  the 
general  movement  was  strongly  toward  a  reduction 
in  the  volume  outstanding.  In  the  first  half  of  each 
year,  on  the  other  hand,  there  is  either  a  decline  or  a 
distinct  retardation  of  the  rate  of  increase.  These 
regular  fluctuations  are  clearly  due  to  what  is  called 
"  moving  the  crops," — the  flow  of  currency  to  the 
West  and  South,  to  effect  of  exchanges  which  accu- 
mulate at  the  time  when  the  staple  agricultural 
products  pass  from  the  hands  of  the  farmers  and 
planters.  The  steadiness  of  this  particular  phenom- 
enon, maintaining  itself  throughout  the  irregularities 
of  the  general  movement,  points  to  a  conclusion  of 
which  ample  confirmation  will  be  found  in  other 
directions  :  that  the  outgo  of  silver  money  into  circu- 


THE   SILVER   CIRCULATION.  I  5 

lation  has  by  no  means  proceeded  with  that  regular- 
ity which  the  legislature  expected  and  intended,  but 
has  been  very  greatly  affected  by  circumstances 
beyond  legislative  control. 

Another  point,  of  some  interest  though  of  no  great 
importance,  is  the  circulation  of  the  actual  coined 
dollars,  which  is  represented  by  the  lowest  line  of 
the  chart.  In  one  respect,  their  circulation  follows 
those  fluctuations  which  have  just  been  noted  in  the 
silver  currency  as  a  whole.  The  volume  almost 
invariably  increases  at  the  close  of  each  year,  and  as 
regularly  decreases  at  the  beginning  of  the  year. 
Apart  from  these  periodic  changes,  there  is  a  general 
slow  increase  until  1886,  and  thereafter  the  amount 
outstanding  remains  practically  stationary.  There 
seems  to  be  room  for  about  sixty  millions  of  the 
dollars,  and  for  no  more. 

The  government  has  made  every  effort  to  get  the 
dollar  coins  out  of  its  hands.  Congress  has  annually 
appropriated  a  sum  to  enable  the  Treasury  Depart- 
ment to  ship  them,  free  of  expense,  to  all  applicants 
in  any  part  of  the  United  States.  The  premium  so 
offered  to  persons  who  have  occasion  to  use  money 
in  small  denominations,  and  especially  to  employers 
having  large  pay-rolls,  has  sometimes  led  to  consid- 
erable call  for  them.  But  the  great  bulk  of  the  coins 
thus  got  out  of  the  Treasury  return  to  it  almost  at 
once.  The  employees,  to  whom  they  are  paid,  get 
rid  of  them  as  fast  as  they  make  purchases;  the 
shopkeepers,  in  whose  tills  they  accumulate,  finding 
their  customers  averse  to  taking  them  in  change, 
turn  them  into  the  banks  on  deposit ;  and  the  banks 


l6  THE   ECONOMIC   SITUATION. 

finally  turn  them  into  the  nearest  sub-treasury  in 
payment  of  public  dues.  The  round-trip  from 
Treasury  back  to  Treasury  is  easily  made,  in  some 
districts,  in  the  course  of  a  single  week.  The  degree 
of  favor  which  they  meet  of  course  affects  this 
movement,  and  varies  in  different  parts  of  the  coun- 
try, apparently  reflecting  in  a  curious  way  the 
popular  feeling  as  to  the  desirability  of  having  silver 
currency  at  all.  They  circulate  very  little  east  of  the 
Alleghanies,  but  are  used  more  freely  and  perma- 
nently in  the  Mississippi  valley.  Among  the  negroes 
of  the  South  the  big  pieces  are  said  to  be  favorites, 
and  find  a  permanent  lodgment.  Their  greatest 
circulation,  as  we  have  seen,  was  reached  in  1886; 
after  that  time  the  change  in  the  denominations  of 
silver  certificates,  to  be  discussed  later,  caused  a 
decline  in  the  amount  used.1 

We  may  now  return  to  the  movements  of  the 
silver  currency  as  a  whole,  indicated  by  the  irregular 
dotted  line  of  the  chart.  Between  that  line  and  the 
unbroken  regular  line  above  it,  indicating  the  maxi- 
mum issue  authorized,  there  is  a  gap  representing 
what  we  may  call  the  dead  silver.  The  gap  stands 
for  the  dollars  coined  (or,  after  1890,  for  the  ounces 
of  silver  purchased),  which  lie  in  the  Treasury,  but 
are  not  injected  in  any  form  into  the  circulating 
medium.  As  a  glance  at  the  chart  shows,  it  is  very 
variable.     It   was    greatest    in    1885    and    1886,   the 

1  The  practice  of  paying  express  charges  on  shipments  of  silver 
dollars  has  ceased  to  be  of  importance  since  18SC,  when  the  issue  of 
silver  certificates  in  small  denominations  was  authorized.  After  that 
date,  as  will  be  presently  explained,  there  was  no  occasion  for  stimu- 
lating the  circulation  of  dollars  rather  than  of  certificates. 


THE   SILVER   CIRCULATION.  1 7 

maximum  being  reached  in  July  of  the  latter  year, 
when  the  dead  silver  was  no  less  than  ninety-four 
million  of  dollars.  It  was  least  in  1881,  and  again 
in  the  last  few  months  of  1889.  The  variations 
show  the  greater  or  less  success  with  which  the 
silver  currency  made  its  way  into  the  working  money 
of  the  country.  By  them  we  may  divide  its  history 
into  four  periods.  The  first  runs  from  1878  to  1884 
a  period  on  the  whole  of  ready  circulation.  Then 
comes  a  break,  in  1885  and  1886,  when  the  silver 
currency  contracted,  and  the  dead  silver  accumulated 
in  the  Treasury, —  much  the  most  interesting  and 
instructive  of  the  three  stages.  The  third  period 
begins  in  1886,  when  the  volume  in  circulation  ex- 
pands, and  gains  rapidly  on  the  total  coinage,  caus- 
ing a  steady  decline  in  the  amount  of  dead  silver 
Finally,  with  the  act  of  July,  1890,  the  whole  silver 
question  enters  on  a  new  phase,  which  can  best  be 
discussed  by  itself.  These  four  periods  I  shall  take 
up  in  succession. 


III. 

1 878- 1 884. 

The  first  silver  dollars  were  coined  in  March,  1878, 
and  in  the  course  of  that  month  190,000  of  them 
went  into  circulation,  while  810,000  remained  in  the 
Treasury.  Something  like  this  proportion  was  main- 
tained through  1878  and  the  first  half  of  1879:  not 
more  than  one  fifth  of  the  coins  made  their  way  into 
the  hands  of  the  public.  Silver  certificates  practi- 
cally did  not  make  their  way  into  circulation  at  all. 

The  history  of  the  certificates  at  this  time  is 
curious  and  significant.  When  the  first  purchases 
of  bullion  were  made,  in  the  course  of  1878,  checks 
in  payment  were  drawn  by  the  Director  of  the  Mint, 
payable  in  silver  dollars.  The  purchases  were  made 
chiefly  at  San  Francisco.  There  the  payees  drew, 
instead  of  silver  dollars,  silver  certificates  of  large 
denominations.  These  were  sent  at  once  to  New 
York ;  and  within  ten  days  from  the  day  of  issue 
they  found  their  way  into  the  Treasury  through  the 
New  York  custom-house.  Had  the  revenues  col- 
lected by  the  government  in  San  Francisco  been 
larger,  they  would  probably  have  been  turned  in  at 
that  port  within   forty-eight    hours.'     The    rapidity 

1  See  the  Report  of  the  Treasurer  in  the  Finance  Report  for  1879, 
p.  350.  Up  to  June,  1879,  there  had  been  issued  .$7,843,o(xj  of  cer- 
tificates of  denominations  of  $1,000,  of  which  $6,683,000  had  been 
redeemed. 

18 


1 878-1 884.  19 

with  which  they  came  back  at  first  nonplussed  the 
officers  of  the  Treasury.  It  was  some  time  before 
they  learned  how  impossible  it  was  to  get  the  certi- 
ficates of  large  denominations  into  circulation  :  a 
result,  however,  which  followed  inevitably  from  the 
unwillingness  of  the  banks,  who  alone  can  con- 
veniently use  the  large  certificates,  to  hold  them  or 
use  them.  It  was  certain  from  the  start  that  the  only 
form  in  which  the  silver  currency  of  1878  could  get 
into  permanent  circulation  was  in  the  denominations 
which  serve  for  every  day  retail  transactions.  In  the 
first  year  no  special  effort  seems  to  have  been  made 
by  the  Treasury  to  get  out  the  certificates  of  the 
smaller  denominations  permitted  by  law.  Conse- 
quently the  dead  silver  accumulated  rapidly.  At 
the  end  of  June,  1879,  out  of  a  total  coinage  of 
thirty-six  millions,  the  Treasury  held  in  its  vaults, 
unrepresented  by  certificates  in  circulation,  no  less 
than  twenty-eight  millions.  These  twenty-eight  mil- 
lions represented  so  much  revenue  paid  out  by  the 
government  for  the  purchase  of  silver  which  was 
simply  stored  away  in  its  vaults.  As  the  revenue 
then  greatly  exceeded  the  expenditure,  the  process 
caused  no  financial  embarrassment ;  but  clearly  it  was 
one  which  could  not  go  on  indefinitely. 

This  phase,  however,  did  not  last  long,  nor  was  it 
characteristic  of  the  general  movement  during  the 
first  of  the  three  periods.  About  the  middle  of  1879 
a  slight  upward  movement  began,  both  in  the  circu- 
lation of  dollars  and  of  certificates.  Towards  the 
end  of  1880,  as  the  chart  indicates,  this  movement 
attained    laree  dimensions.     The   amount    of    silver 


20  THE   ECONOMIC   SITUATION. 

certificates  in  circulation  increased  with  a  bound, 
rising  from  less  than  eight  millions  in  August  to 
more  than  thirty-six  millions  in  December,  and  leav- 
ing only  a  narrow  margin  of  dead  silver  in  the 
Treasury.  In  the  first  half  of  1881  there  was  a  check 
to  the  increase  ;  but  in  the  second  half  of  that  year 
the  upward  movement  was  resumed.  By  the  end  of 
December,  1881,  the  silver  certificates  in  the  hands 
of  the  public  amounted  to  over  sixty-two  millions, 
and  the  circulation  of  dollars  and  certificates  com- 
bined was  within  seven  millions  of  the  total  amount 
coined. 

Some  explanation  of  this  sudden  and  extraordinary 
change  is  to  be  found  in  a  new  measure  adopted  by 
the  Treasury  Department  for  the  purpose  of  pushing 
the  silver  into  circulation.  In  September,  1880,  the 
Treasury  issued  a  circular  by  which,  in  exchange  for 
deposits  of  gold  coin  with  the  assistant  Treasurer  in 
New  York,  drafts  were  offered  on  the  sub-treasuries 
in  the  South  and  West,  payable  in  silver  certificates. 
In  other  words,  the  Treasury  undertook  to  save  the 
expense  of  the  transportation  of  cash  to  all  persons 
who  had  occasion  to  remit  to  the  South  and  West. 
The  bait  took  :  large  amounts  of  certificates  were 
paid  out,  in  exchange  for  deposits  in  New  York,  by 
sub-treasuries  at  New  Orleans,  St.  Louis,  Chicago, 
and  Cincinnati,1  The  payments,  as  we  might  expect, 
were    almost    entirely    in    certificates    of    the    two 

1  See  the  Report  of  the  Treasurer  for  1SS1,  in  the  Report  on  the  Fi- 
nances, p.  430.  Between  October  15,  1882,  and  March  2,  1883,  this 
practice  was  suspended,  and  it  was  finally  discontinued  in  January, 
1885.  By  far  the  largest  part  of  the  silver  certificates  issued  under  it 
were  paid  out  by  the  sub-treasuries  of  St.  Louis  and  New  Orleans, — a 
clear  indication  ofthe  region  from  which  the  demand  for  money  came. 


1 878- 1 884. 


21 


smallest  denominations  then   allowed  by  law, — for 
ten  and  twenty  dollars.1 

It  is  obvious  that  a  device  such  as  the  Treasury 
resorted  to  in  1880  would  have  had  no  effect  on  the 
movement  of  the  silver  currency  out  of  the  public 
vaults,  if  the  demand  for  cash  to  be  shipped  west- 
ward had  not  caused  exchange  in  New  York  on  the 
West  to  be  at  a  premium.  The  conditions  of  the 
time  led  to  such  a  demand,  and  it  was  inevitable 
that  there  should  be  in  some  form  or  other  a  west- 
ward movement  of  cash.  Had  there  been  no  silver 
currency,  there  would  certainly  have  been  an  inflow 
of  gold  from  abroad  even  greater  than  in  fact  took 
place.  It  is  not  necessary  to  do  more  than  recall 
to  the  reader's  mind  the  salient  events  of  these 
unusual  years,  which  concurred  so  luckily  to  assure 
the  success  of  the  resumption  of  specie  payments, 
and   to  make  possible  the  absorption  of  the  silver 

1  The  denominations  of  the  silver  certificates  outstanding  at  the 
close  of  the  fiscal  year  1882  are  given  below.  I  have  added  figures 
for  1886,  by  way  of  illustrating  the  form  in  which  the  silver  currency 
went  into  circulation  at  the  period  here  under  consideration. 


Silver  certificates. 

1882. 

1886. 

29.2 
25.0 
3-3 
4.0 

'•7 
2.9 

S°- 3 
45.0 

7-4 
96 
1  8 

1.9 

It  must  be  remembered  that  "  outstanding"  here  means  issued  by 
the  Treasury,  and  includes  certificates  held  by  the  Treasury  against 
itself  ;  and  the  chances  are  that,  even  of  the  small  amounts  of  large 
certificates,  a  good  part  was  held  by  the  Treasury  in  its  cash.  Com- 
pare the  footnote  to  p.  43  below. 


22 


THE   ECONOMIC   SITUATION. 


currency.  The  crops  of  1878  to  1882  were  abundant, 
even  after  making  allowance  for  the  comparatively 
lean  year  1881  ;  the  crops  in  Europe  were  meagre; 
our  exports  suddenly  swelled,  and  attained  in  the 
fiscal  year  188 1  a  volume  which  was  not  again  reached 
until  1891-92,  when  similar  conditions  resulted  in 
even  heavier  exports.  Large  quantities  of  gold  flowed 
in  during  the  fiscal  years  1880  and  1881.  The  long- 
period  of  depression  which  began  with  the  crisis  of 
1872  was  likely  to  have  been  followed  in  any  case  by 
a  renewal  of  activity  ;  the  sudden  turn  in  foreign  trade 
contributed  not  a  little  to  stimulate  the  general  re- 
vival. In  all  directions  new  operations  were  begun, 
and  old  ones  pushed  on  a  larger  scale.  The  building 
of  railroads  and  the  production  of  iron,  both  supposed 
to  be  barometers  of  trade,  advanced  with  extraordL 
nary  steps.     Most  significant  of  all,  bank  loans  *  and 

1  For  convenient  reference,  some  significant  figures  as  to  bank  oper- 
ations are  here  given  for  the  whole  period  from  1878  to  1889.  The 
figures  (except  for  the  last  column)  indicate  millions. 


Oct.  1,  18 


1879. 


1884. 
1885. 
1886. 
1887. 
1888. 


Total  deposit* 
in  all  nationa 
banks. 


679 
769 
968 
1,112 
1,119 
1,168 
1,099 
1,248 
1,301 
1,388 
1.543 
1,655 


Total  specie 
and  lawful 
money  held. 


127.7 
138. 1 
172.5 
172.6 
1748 
188.4 
219.8 

263S 
225.1 
245  o 
268  2 
263.0 


Reserve  held 

by 

banks  of 

N 

:w  York. 

5°-9 

S3 

I 

7° 

6 

62 

5 

64 

4 

70 

8 

90 

8 

115 

7 

77 

0 

No 

1 

q6 

4 

84 

9 

Proportion    of 
reserve  to 
deposits  in 
New  York, 


26.8* 

25-3 
26.4 
23-3 
25-4 
26.5 
35-6 
37-o 
27.2 
28.2 
28.2 
25.1 


The  reader  will  note  the  rise  in  deposits,  and  the  stationary  reserve, 
in  1880-84.  The  slackening  of  the  growth  of  deposits  in  1884-85  and 
the  marked  accumulation  of  cash  at  that  time  will  be  considered  later, 
when  we  come  to  the  second  phase  of  the  silver  situation. 


1878-1884.  23 

deposits  swelled  rapidly ;  the  reserve  of  lawful 
money  after  1880  remained  nearly  stationary ;  the 
national  bank  circulation  rose,  and  reached  its  highest 
point  in  the  latter  part  of  1882. 

All  this  activity  meant  a  greater  use  of  money  in 
paying  wages,  in  the  retail  transactions  of  every-day 
life,  in  "  moving  the  crops."  The  rapid  growth  of 
population,  especially  in  the  West  and  South,  would 
have  in  any  case  brought  about  a  greater  demand  for 
what  we  may  call  large  change.  The  conditions  under 
which  national  bank  notes  could  be  issued  were 
already  becoming  so  unpromising  that  no  consider- 
able increase  in  their  quantity  could  take  place  ;  and 
the  silver  currency  consequently  found  a  ready  and 
permanent  circulation.  The  Treasurer  of  the  United 
States,  in  his  report  for  1881,  thought  himself  justified 
in  saying  that  their  issue  "  averted  what  might  have 
proved  to  be  a  serious  public  inconvenience."  No 
doubt  the  absence  of  any  increase  in  the  currency 
would  have  been  an  inconvenience.  But  if  there  had 
been  no  silver,  other  sorts  of  money  would  not  have 
failed  to  supply  the  need.  As  it  was,  the  issue  of 
bank-notes  increased  under  the  influence  of  the  same 
causes  that  led  to  the  greater  use  of  silver ;  a  large 
importation  of  gold  took  place.  In  one  or  both  of 
these  forms,  the  money  supply  would  have  adapted 
itself  to  the  demand.  In  the  absence  of  silver,  an 
even  greater  importation  of  gold  would  have  taken 
place,  and  the  every-day  circulating  medium  would 
have  been  made  up  in  large  proportion  of  that 
metal. 

These    general    conditions   were    little    changed 


24  THE   ECONOMIC   SITUATION. 

through  the  years  1882  and  1883.  There  was  no  such 
decided  swing  in  business  operations  as  there  had 
been  in  the  two  years  preceding;  but  some  advance 
continued.  The  volume  of  bank  loans  and  deposits, 
as  shown  by  the  Comptroller's  reports  on  the 
national  banks,  steadily  increased,  though  at  a 
slackening  rate,  until  the  close  of  1883.  While  the 
conditions  thus  continued  favorable  for  an  increase 
in  the  amount  of  money  in  active  circulation,  the 
decline  in  the  circulation  of  national  bank-notes, 
which  began  after  the  maximum  had  been  reached 
in  the  early  part  of  1882,  contributed  still  more  to 
make  way  for  a  growth  in  the  volume  of  silver 
used  by  the  community.  Accordingly,  while  there 
was  some  check  in  1882  to  the  upward  movement  of 
outstanding  silver,  that  movement  was  resumed  in 
1883;  and  on  the  whole,  for  the  three  years  1881, 
1882,  and  1883,  the  silver  currency  was  absorbed  by 
the  public  as  fast  as  the  dollars  were  coined  at  the 
mint. 


IV. 

1885-1886. 

The  signs  of  a  general  reaction,  such  as  all 
experience  would  lead  us  to  regard  as  inevitable 
showed  themselves  with  the  beginning  of  1884.  The 
extraordinary  failures  of  the  Marine  National  Bank 
and  of  the  firm  of  Grant  &  Ward  took  place  in  May, 
1884,  and  were  followed  by  other  bank  suspensions, 
by  the  failures  of  various  private  bankers  and 
brokers,  and  the  break-down  of  large  railway  enter- 
prises,  notably  of  the  West  Shore  Railroad.  While 
there  was  no  acute  crisis  like  that  of  1873,  all  the 
signs  of  a  period  of  depression  showed  themselves. 
The  building  of  railroads  almost  ceased  ;  the  pro- 
duction of  iron  fell  off ;  bank  loans  and  deposits 
declined.  With  this  general  break-down,  the  cir- 
culation of  the  silver  currency  entered  on  its  sec- 
ond phase. 

As  the  chart  indicates,  the  beginning  of  1884 
showed  some  decline  in  the  amount  of  silver  dollars 
and  certificates  held  by  the  public.  This  was  fol- 
lowed in  the  autumn  months  by  the  usual  increase  ; 
but  in  the  early  part  of  1885  there  was  a  sharp  de- 
cline. No  appreciable  growth  took  place  in  the 
autumn  months  of  1885,  at  the  time  when  a  growth 
was  most  likely  to  take  place  ;  and  the  little  that  was 

25 


26  THE   ECONOMIC   SITUATION. 

gained  was  lost  again  in  the  first  half  of  1886.  On 
the  whole,  the  silver  currency  in  the  hands  of  the 
public  remained  stationary  from  the  beginning  of 
1884  till  the  middle  of  1886.  Under  these  conditions 
the  regular  coinage  of  silver  dollars  necessarily  caused 
dead  silver  to  accumulate  in  the  Treasury,  and  in 
July  of  1886  the  dead  silver  reached  its  maximum, 
nearly  ninety-four  millions  of  dollars. 

The  explanation  of  the  stationary  volume  of  the 
silver  currency  is  not  difficult  to  find.  With  the 
general  standstill  or  decline  in  business  activity, 
the  occasions  for  the  use  of  money  for  transfer 
from  hand  to  hand  ceased  to  grow,  even  became 
less.  The  bank  deposits,  and  the  clearings  of  the 
banks  in  the  cities,  shrank  appreciably,  indicating 
a  decline  in  wholesale  transactions.  The  currency 
of  retail  and  consumer's  transactions,  in  which  the 
silver  had  hitherto  found  room  for  expansion,  showed 
a  similar  tendency.  As  is  usual  in  periods  of  de- 
pression, the  unused  money  of  the  public  accumu- 
lated in  the  vaults  of  the  banks,  and  what  is  called  a 
plethora  of  money  continued  through  the  year  1885. 

The  general  conditions  which  caused  cash  to  ac- 
cumulate in  the  reserves  of  the  banks,  caused  the 
silver  certificates  to  accumulate  in  the  vaults  of  the 
government.  The  silver  certificates  in  general  now 
went  through  the  same  course  which  we  have  seen 
in  the  circulation  of  the  silver  dollars  and  of  the 
certificates  of  large  denominations.  The  people  had 
less  occasion  for  using  money  than  before ;  they  cer- 
tainly had  no  occasion  to  use  the  additional  silver 
currency  which    the  regular  monthly   coinage    was 


1885-1886. 


V 


creating;  the  banks  would  not  let  the  silver  accu- 
mulate on  their  hands  ;  consequently  it  found  its  way 
back  into  the  government  vaults.  The  figures  as  to 
the  customs  receipts  of  the  government  at  New  York 
show  exactly  when  and  how  this  back-flow  took 
place.'  During  1S82  and  1SS3  gold  and  gold  certifi- 
cates had  formed  between  70  and  80  per  cent,  of  the 
customs  receipts  at  New  York, — the  largest  single 
point  of  collection  for  the  public  revenue.  Begin- 
ning with  1884,  the  proportion  sank,  and  for  the  fiscal 
year  1884-85  it  was  less  than  35  percent.  Silver,  in 
the  form  of  dollars  and  certificates,  accumulated  in 
the  Treasury,  while  from  the  beginning  of  1885  till 
the  middle  of  1886  the  silver  currency  in  the  hands 
of  the  public  declined. 

The  situation  of  the  Treasury  under  these  circum- 
stances was,  if  not  dangerous,  at  least  suggestive  of 
the  danger  of  a  break-down  in  the  policy  which  the 
government  has  succeeded  in  pursuing  ever  since  the 
resumption  of  specie  payments, — that  of  paying  gold 
to  every  creditor  who  chooses  to  demand  it.  The 
amount  of  gold  in  the  government's  revenue  was 
shrinking;    and,  moreover,    with   the   depression    in 

1  The  receipts  from  customs  at  New  Vork  were  made  up  as  follows : 


Gold  coin 
and 

Silver  coin 
and 

United  States 

certificates. 

certificates. 

First     six  months  of 

883.... 

75-8* 

17.8* 

6.4* 

Second  " 

883.... 

77-5 

16.8 

5-7 

First      " 

884.... 

59-8 

27.9 

12.3 

Second  " 

884 ... . 

34-7 

34-9 

3°-4 

First      

885.... 

36.0 

366 

27-4 

Second  "         " 

885.... 

55-3 

14.6 

3°  1 

First      

[886.... 

28.2 

12  5 

59-3 

Second  "          "        " 

[886. . . . 

47-3 

11. 6 

41. 1 

28  THE   ECONOMIC   SITUATION. 

trade,  customs  receipts  diminished,  and  the  total 
revenue  was  also  falling  off.  On  the  other  hand,  the 
ordinary  gold  liabilities  and  payments  showed  little 
decline,  if  any.  The  chief  point  of  disbursement  of 
the  government  is  through  the  sub-Treasury  in  New 
York,  which  is  a  member  of  the  New  York  clearing- 
house, and  has  regularly  larger  amounts  to  pay  than 
to  receive.  The  banks,  who  are  its  creditors  at  the 
clearing-house,  prefer  gold.  The  result,  from  the 
beginning  of  1884,  when  silver  began  to  crowd  gold 
out  of  the  public  receipts,  was  a  heavy  drain  on  the 
government's  reserve  of  gold.  If  the  reader  will  turn 
to  the  chart,  and  observe  the  line  representing  the 
government's  gold  holdings,  he  will  see  that  the 
amount  fell  from  over  one  hundred  and  fifty  millions 
in  the  beginning  of  1884  to  less  than  one  hundred 
and  sixteen  millions  at  the  close  of  May,  1885. 

The  policy  of  the  Treasury  during  this  period  was 
simple,  though  not  always  easy  to  maintain.  After 
the  death  of  Secretary  Folger  in  September,  1884, 
Mr.  Gresham  was  put  in  charge  of  the  Treasury,  but 
was  succeeded  in  a  month  by  Mr.  McCulloch,  who 
remained  in  office  till  March  of  the  following  year, 
when  the  new  administration  brought  Mr.  Manning 
into  the  office.  Both  Mr.  McCulloch  and  Mr.  Man- 
ning refrained  from  pushing  silver  certificates  into 
circulation  where  they  were  not  wanted  ;  paid  out 
silver  currency  whenever  it  was  likely  to  stay  out ; 
ceased  to  pay  out  funds  for  the  redemption  of  bonds  ; 
and  endeavored  to  strengthen  the  reserve  of  gold. 
As  to  the  silver  certificates,  the  policy  of  the  Treas- 
ury  is  shown  by  the  events  in  Boston  during  the 


1885-1886.  29 

early  part  of  the  summer  of  1885.  At  the  sub- 
Treasury  at  Boston,  silver  certificates  had  been  paid 
out  less  sparingly  than  at  New  York.  Silver  cur- 
rency consequently  became  so  plentiful  that  hardly 
any  other  form  of  money  was  to  be  had.  A  turn  in 
the  balance  of  payments  between  New  York  and 
Boston  brought  occasion  for  remitting  cash  to  New 
York.  For  such  remittances,  the  tacit  understanding 
of  the  banks  made  silver  unavailable.  Consequently 
exchange  on  New  York  came  into  demand,  and  went 
up  to  a  premium  of  a  dollar  a  thousand.  The  express 
charge  for  carrying  cash  to  New  York  is  only  fifty 
cents  a  thousand  ;  but  cash  available  for  New  York 
payments,  —  namely,  gold  or  greenbacks,  —  was 
scarce ;  hence  the  unusual  premium  on  New  York 
exchange.  The  Boston  banks  thereupon  appealed 
to  the  Secretary  of  the  Treasury  to  cease  paying  out 
silver  certificates  at  the  Boston  sub-Treasury.  Their 
request  was  granted ;  and  a  repetition  of  this  sort  of 
embarrassment  was  thereby  prevented.1 

On  the  other  hand,  the  Treasury  made  an  effort  to 
check  the  return  of  silver  currency  into  its  vaults 
by  getting  more  silver  dollars  into  permanent  cir- 
culation. At  this  time  the  currency  of  the  denom- 
ination of  one  and  two  dollars  consisted  almost 
exclusively  of  United  States  notes,  or  greenbacks.2 

1  It  was  at  this  time  that  the  Boston  banks  adopted  definitely  the 
New  York  practice  of  not  using  silver  certificates  in  payment  of 
clearing-house  balances.  See  the  note  to  page  12,  above.  The  rev- 
enue payments  to  the  sub-Treasury  at  Boston  were  comparatively 
small,  and  the  Boston  banks  accordingly  had  not  so  ready  a  means  of 
getting  rid  of  their  silver  certificates  as  those  of  New  York. 

2  Bank-notes  of  less  than  five  dollars  had  not  been  issued  since 
1879,  tnc  resumption  act  having  prohibited  their  issue  after  that  date. 


30  THE   ECONOMIC   SITUATION. 

In  June,  1885,  the  issue  of  greenbacks  in  denomina- 
tions of  less  than  five  dollars  were  stopped,  in  the  hope 
of  bringing  about  a  greater  use  of  the  coined  dollar. 
The  effects  of  this  measure  could  only  be  gradual. 
The  one  dollar  and  two  dollar  notes  already  in  circu- 
lation could  return  to  the  Treasury  only  as  they  be- 
came dirty  and  unfit  for  use  and  so  were  sent  in  to 
be  exchanged  for  clean  notes.  The  old  notes  could 
then  be  destroyed,  and  new  notes  of  larger  denomi- 
nations furnished  in  their  place.  As  it  turned  out, 
the  public  had  a  strong  preference  for  notes  rather 
than  coin,  and  when  it  appeared  that  new  notes  of 
small  denominations  were  no  longer  to  be  supplied, 
the  old  ones  were  kept  in  use  long  after  they  had 
become  unfit  for  circulation.  Dirty  notes  were  pre- 
ferred to  bulky  dollars.  Consequently,  the  success 
of  this  measure  was  not  great.  Nevertheless,  some- 
thing was  secured;  for  in  the  second  half  of  1885, 
when  the  general  conditions  were  unfavorable  to  an 
increase  in  the  outstanding  circulation,  and  when  the 
silver  certificates  in  the  hands  of  the  public  in  fact 
showed  a  decline,  the  amount  of  silver  dollars  out- 
standing showed  an  increase  of  ten  millions.  The 
gain  was  made  chiefly  in  the  South,  and,  so  far  as  it 
went,  helped  in  preventing  the  Treasury  from  being 
overwhelmed  by  the  accumulation  of  silver. 

Much  more  important  as  a  means  of  tiding  over 
the  period  of  depression  was  the  cessation  of  the 
payment  of  the  public  debt.  In  1885  there  were  still 
outstanding  about  two  hundred  millions  of  3  per 
cent,  bonds,  issued  in  1882  in  place  of  older  bonds 
bearing  a  higher  rate  of  interest,  and  redeemable  at 


1885-1886.  3i 

par  at  the  pleasure  of  the  government.  The  process 
of  calling  them  in,  and  reducing  the  public  debt  by 
their  payment,  had  begun  immediately  after  their 
issue,  and  had  gone  on  steadily  until  late  in  1884. 
Then  it  ceased,  although  the  government  revenue 
still  continued  to  exceed  its  expenses.  From  Sep- 
tember, 1884,  until  December,  1885,  a  period  of  more 
than  a  year,  no  bonds  were  called,  and  the  interest- 
bearing  public  debt  remained  stationary.1  In  other 
words,  the  surplus  revenue  of  the  government,  in- 
stead of  finding  its  usual  vent  in  the  redemption  of 
bonds,  was  devoted  to  increasing  the  dead  silver  in 
the  Treasury  vault.  Every  month  two  millions  were 
spent  in  buying  silver  bullion  and  coining  it  into 
dollars,  which  were  stowed  away  in  the  Treasury 
vaults  out  of  harm's  way.  In  addition,  large  quanti- 
ties of  silver  certificates  were  received  in  payment  of 
public  dues,  and  then  allowed  to  lie  idle  in  the 
Treasury.  In  August,  1885,  there  were  nearly  forty- 
three  millions  of  silver  certificates  in  the  Treasury, 
the  largest  holding  since  the  passage  of  the  act  of 
1878.  The  result  of  this  cautious  policy  was  to 
retire  the  redundant  silver  certificates  :  as  this  was 
accomplished,  less  of  them  were  turned  in  to  the 
Treasury  in  payment  of  public  dues ;  more  gold 
flowed  in,  and  the  government's  gold  reserve  rose. 

1  This  does  not  appear  in  the  annual  reports  of  the  Secretary  of  the 
Treasury,  which  run  for  the  fiscal  year  ending  June  30th.  Bonds 
were  called  in  the  first  half  of  the  fiscal  year  1884-85,  and  in  the  sec- 
ond half  of  1885-86,  so  that  the  reports  for  each  year  states  a  decline 
in  the  bonded  debt.  But  the  131st  rail  for  bonds  matured  on  Novem- 
ber 1,  1884  ;  the  I32d,  on  February  1,  1886.  Between  those  dates 
the  3  per  cents,  outstanding  remained  stationary,  at  194.2  millions. 


32  THE   ECONOMIC   SITUATION. 

It  is  obvious  that  the  Treasury  could  pursue  with 
success  the  course  just  described  only  because  its 
income  exceeded  its  expenditure.  In  the  eighteen 
months  between  the  beginning  of  1885  and  the  mid- 
dle of  1886,  the  government  received  over  twenty- 
six  millions  in  silver  certificates  which  it  did  not 
reissue  ;  paid  out,  in  addition,  some  thirty-six 
millions  for  silver  bullion,  which  was  coined  into 
silver  dollars,  and  in  that  form  stowed  away  in  the 
Treasury  vaults;  and  materially  increased  its  net 
holdings  of  gold.  These  enormous  sums  of  course 
represent  an  excess  of  income  over  outgo.  Notwith- 
standing the  decline  in  its  receipts  as  compared  with 
earlier  years,  the  government  still  had  a  surplus  so 
large  as  to  enable  it  to  hoard  sixty  millions  of  silver 
currency,  and  to  add  twenty-five  millions  to  its  hold- 
ings of  gold,  before  it  resumed,  in  the  beginning 
of  1886,  the  repayment  of  the  public  debt.  In  the 
financial  history  of  any  other  country  such  a  surplus 
would  be  considered  a  rare  piece  of  good  luck.  We 
had  it  for  so  many  years  that  we  did  not  fairly 
realize  what  risks  it  enabled  us  to  run  without 
coming  to  grief. 

Further  aid  came  in  1885  from  the  willingness  of 
the  New  York  banks  to  support  the  Treasury.  In 
July  of  1885,  when  the  gold  reserve  was  at  its  lowest, 
the  banks  of  New  York,  through  the  clearing-house, 
turned  over  to  the  Treasury  $5,915,000  of  gold,  in 
exchange  for  fractional  silver.1     The  transaction  was 

1  The  correspondence  relating  to  this  transaction  is  printed  in  the 
report  made  by  Secretary  Manning  in  March,  1886,  in  answer  to  an 
inquiry  from  the  House  of  Representatives.      House  Executive  Docu- 


1885-1886.  33 

called  an  "  exchange  "  ;  it  was  to  all  intents  and 
purposes  a  loan.  The  banks  moreover  expressed 
their  willingness  to  lend  more,  if  more  should  be 
needed.  The  avowed  object  was  to  enable  the 
Treasury  to  maintain  gold  payments  until  the  meet- 
ing of  Congress  in  December,  when  legislation  for 
stopping  the  silver  issues  seems  to  have  been  ex- 
pected. 

It  is  an  open  question  whether  at  that  juncture 
the  situation  was  such  as  to  make  necessary  this  call 
on  the  banks  for  aid.  There  was  certainly  a  strong 
feeling  of  doubt  as  to  the  Treasury's  ability  to  main- 
tain its  policy  of  paying  gold  to  any  creditor  who 
wanted  it.  That  feeling  showed  itself  in  the  pages 
of  leading  financial  journals,  like  the  Financial 
Chronicle,  which  steadily  represented  the  situation 
to  be  full  of  danger  ;  and  it  was  reflected  in  the  con- 
cluding chapter  of  Professor  Laughlin's  History  of 
Bimetallism,  published  in  the  course  of  1885.  It 
was  shown  in  a  more  practical  form  by  the  striking 
increase  in  the  holdings  of  gold  by  the  banks,  and 
by  their  disposition  to  turn  into  the  Treasury  not 
only  silver,  but  greenbacks  as  well.  The  specie  held 
by  the  banks  of  New  York,  for  example,  rose  from 
about  seventy-two  millions  in  the  early  part  of  1884 
to  one  hundred  and  thirteen  millions  in  the  middle 
of  1885.'     The  larger  part  of  this  gain  of  specie  was 

menis,  4gth  Congress,  ist  session  (1885-86),  vol.  30,  No.  100.  At  the 
end  of  October,  1885,  when  the  Treasury  gold  had  risen  to  %  142, 000,- 
000,  the  banks  asked  for  a  return  of  part  of  their  gold,  and  were  told 
by  Acting-Secretary  Fairchild  they  could  have  the  whole  of  it. 

1  The  reports  of  the  Comptroller  of  the  Currency  state  the  hold- 
ings of  specie  and  of  legal   tenders  by  all   the  national  banks,  at  the 
3 


34 


THE    ECONOMIC    SITUATION. 


in  gold  ;  but  some  part  probably  was  in  silver  certifi- 
cates, which  are  accounted  "  specie,"  and  which  were 
accumulating  in  the  tills  of  the  bank,  and  were 
turned  over  to  the  Treasury  as  fast  as  possible  in 
customs  payments.  The  greenbacks,  which,  like 
the  silver  certificates,  flowed  into  their  tills  in  the 
course  of  the  depression,  were  also  turned  over  to 
the  government  in  payment  of  public  dues.  As  the 
figures  given  a  few  moments  ago  show,  the  govern- 
ment was  getting  thirty,  forty,  fifty  per  cent,  of  its 
customs  receipts  at  New  York  in  the  form  of  green- 
backs.1 Such  an  inflow  of  greenbacks  was  an  unmis- 
takable sign  that  general  confidence  in  the  ability  of 
the  Treasury  to  maintain  gold  payments  was  shaken. 
Gold  in  hand  was  preferred  to  the  greenback,  the 
government's  promise  to  pay  gold. 

A  word  may  be  said  here  as  to  the  position  of  the 
United  States  notes,  or  greenbacks.     The  amount  of 

dates  stated  below  ;  to  which  I  have  added,  from  the  weekly  state- 
ments in  the  Financial  Chronicle,  the  holdings  by  the  New  York 
banks  at  the  same  dates  : 


All  national  banks. 

Banks  of  New  York. 

Specie. 

Legal  tenders. 

Specie. 

Legal  tenders. 

122. 1 

114. 7 
109.7 
128.6 

J39-7 
167. 1 
■77-4 
177.6 

'74-9 
165.4 
171. 6 

157-5 
1490 

75  R 

71.9 
58.2 
5i-3 
73  8 
86.8 
103.8 
113.0 
H3-9 

29.7 
28.1 

77 
76 
77 
76 
71 
77 
79 
69 

67 

67 

79 
64 

7 
9 
0 

4 
0 
3 
7 
7 
6 
0 
6 

28.8 

30.4 
37-7 
32.0 
3a-7 
43-6 

Oct    i 

91.0                     27.2 
89.7                      31.7 

66.5  40.0 

68.6  25.7 

1886  March  1 

1  See  the  note  to  p.  27,  above. 


1885-1886.  3S 

these  obligations  outstanding  was  fixed  by  the  act  of 
May,  1878,  at  the  point  where  they  then  stood, — 
$346,681,016.  The  resumption  of  specie  payments 
in  1879  made  them  redeemable  in  coin;  "coin" 
being  then  undoubtedly  supposed  to  mean  gold.  The 
Treasury  has  ever  since  held  itself  willing  to  redeem 
in  gold  any  notes  presented  ;  but  Congress  has  never 
made  any  specific  provision  as  to  the  amount  of  gold 
to  be  reserved  for  that  purpose.  The  Resumption 
Act  itself,  passed  in  1875,  simply  directed  the  Secre- 
tary of  the  Treasury  to  redeem  the  notes  after 
January  1,  1879,  anc^  authorized  him  to  accumulate 
gold  for  that  purpose  by  selling  bonds  ;  but  how 
much  gold  he  was  to  accumulate  or  to  keep  on  hand, 
was  left  to  his  discretion.  The  only  approach  to 
the  statement  of  a  specific  reserve  is  to  be  found 
in  an  act  of  1882,  in  which  a  section  authorizing  the 
issue  of  gold  certificates  is  qualified  by  the  proviso 
"  that  the  Secretary  of  the  Treasury  shall  suspend 
the  issue  of  such  gold  certificates  whenever  the 
amount  of  gold  coin  and  bullion  in  the  Treasury  re- 
served for  the  redemption  of  United  States  notes 
falls  below  one  hundred  millions  of  dollars."  ' 

This  proviso  has  been  construed  by  some  Secre- 
taries of  the  Treasury  with  greater  strictness,  by 
others  with  less  ;  but  all  Treasury  statements  since 

1  The  act  was  one  for  extending  the  corporate  existence  of  national 
banks  :  the  section  here  referred  to  had  nothing  to  do  with  its  main 
provisions.  See  Dunbar's  Laws  Relating  to  Currency,  Finance,  and 
Banking,  p.  223. 

As  to  the  history  and  meaning  of  the  proviso  as  to  the  hundred 
millions,  see  Horace  White,  "  The  Silver  Situation,"  in  the  Quarterly 
Journal  of  Economics,  July,  1S90,  vol.  iv.,  p.  397. 


36  THE   ECONOMIC   SITUATION. 

its  enactment  have  set  aside,  in  some  form,  one  hun- 
dred millions  of  gold  as  a  separate  fund  among  the 
assets.  On  the  face  of  it,  the  only  legal  duty  im- 
posed on  the  Secretary  of  the  Treasury  seems  to  be 
that  of  suspending  the  issue  of  gold  certificates  when 
the  gold  in  the  Treasury  is  less  than  one  hundred 
millions.  It  can  hardly  be  maintained  that,  when 
his  gold  reaches  the  hundred-million  line,  he  must 
refuse  to  pay  it  out  for  any  purpose  except  the  re- 
demption of  United  States  notes.  But  practically 
it  is  immaterial  what  precise  legal  interpretation  is 
given  to  the  section  in  regard  to  the  gold  reserve. 
Even  in  1882,  the  greenbacks  did  not  stand  alone,  as 
they  doubtless  were  supposed  to  do  ;  since,  for  all 
practical  purposes,  the  silver  certificates  constituted 
an  obligation  bearing  on  the  gold  reserve  as  much  as 
did  the  greenbacks.  Certainly  at  present,  when  the 
act  of  1890,  as  we  shall  presently  see,  has  added  a 
new  and  large  mass  of  notes  constituting  a  direct 
liability  against  the  government's  gold,  it  is  quite 
out  of  the  question  for  the  Treasury  to  adopt  any 
policy  which  treats  the  greenbacks  as  a  distinct  and 
peculiar  claim  on  its  holdings.  The  currency  which 
the  government  now  issues  includes  not  only  the 
greenbacks,  but  also  the  silver  certificates,  the  silver 
dollars,  and  the  Treasury  notes  of  1890.  All  of 
these  it  tries  to  keep  equal  to  gold  :  the  green- 
backs and  the  new  notes  by  the  direct  offer  of  im- 
mediate redemption  in  gold  ;  the  silver  dollars  and 
silver  certificates  by  its  willingness  to  accept  them 
in  all  payments  to  itself,  coupled  with  the  offer  to 
make    all  payments   to  its  creditors   in   gold.     The 


1885-1886.  37 

money  which  rests  on  the  government  gold  reserve 
therefore  now  includes  much  more  than  the  green- 
backs. If  one  hundred  millions  was  thought  a 
minimum  reserve  for  the  greenbacks  alone,  certainly 
no  less  sum  will  suffice  for  the  larger  mass.  Hence 
any  approach  to  a  hundred  millions  in  the  Treasury 
holdings  of  gold  must  be  a  source  of  anxiety  to  a 
conservative  Secretary  ;  and  the  tradition  of  a  re- 
quired reserve  for  the  greenbacks,  whether  or  no 
it  has  a  clear  legal  basis,  makes  that  limit  important 
in  the  eyes  of  the  public  as  well  as  of  the  govern- 
ment officers. 

The  low  level  reached  by  the  gold  reserve  in  the 
middle  of  1885  was,  therefore,  a  natural  source  of 
the  uneasiness  which,  as  we  have  seen,  the  Treasury 
and  the  public  then  showed.  On  the  other  hand, 
there  were  elements  of  strength  in  the  situation 
in  1885.  By  far  the  most  important  of  them- was 
the  surplus  of  revenue  over  expenditure,  which 
was  used  as  a  means  of  preventing  the  silver  cur- 
rency from  being  put  in  circulation  in  excessive 
quantities.  Some  revival  of  business  activity  set 
in  during  the  second  half  of  1885,  helping  the  Treas- 
ury in  both  directions.  It  caused  an  increase  in  the 
receipts  from  customs  duties  and  other  sources ;  it 
also  caused  an  increased  use  of  silver  currency  in 
the  reviving  business  of  the  people.  The  decline  in 
the  volume  of  the  silver  currency  outstanding  came  to 
an  end  in  the  autumn  of  1885,  while  the  gold  reserve 
showed  a  considerable  upward  movement.  The  period 
of  real  embarrassment  lasted  only  a  few  months,  in 
the  spring  and  summer  of  1885.  By  the  end  of  that 
year  the  situation  could  no  longer  cause  anxiety. 


V. 

1886-1890. 

The  third  of  the  periods  into  which  we  have 
divided  the  historical  account  begins  with  the  year 
1886.  If  the  reader  will  turn  once  again  to  the 
chart,  he  will  observe,  in  the  middle  of  1886,  a  sharp 
upward  movement  in  the  line  showing  the  volume  of 
silver  in  use  with  the  public.  The  change  marks  the 
beginning  of  a  new  stage.  The  situation  at  this 
period  was  modified  by  two  factors  of  importance  : 
first,  the  sharp  decline  in  the  national  bank  circula- 
tion, and,  second,  the  issue  of  silver  certificates  of 
very  small  denominations. 

The  decline  in  the  national  bank-note  circulation 
presents  a  set  of  questions  different  from  those  dis- 
cussed in  the  present  paper.  A  very  brief  statement 
of  its  causes  and  extent  will  suffice  to  make  clear  its 
bearing  on  the  present  subject.  The  steady  improve- 
ment in  the  credit  of  the  United  States,  causing  its 
bonds  to  yield  a  lower  and  lower  rate  of  interest, 
tended  to  cut  down  more  and  more  the  profit  on  the 
issue  of  national  bank-notes,  until  by  1883  that  profit 
had  practically  disappeared.  After  the  revival  of  activ- 
ity in  1880,  the  amount  of  bank-notes  in  circulation 
increased,  with  little  interruption,  until  the  close  of 
1882,  when  it  reached  its  maximum.  Then  a  de- 
cline  set   in,  which   continued   without   interruption 

38 


i 886- i 890.  39 

ur>til  1890.  The  immediate  cause  was  the  steady 
redemption  by  the  government  of  the  3  per  cent, 
bonds  of  1882,  of  which -the  banks  held  largely.  Other 
bonds  in  the  market, — the  4  and  4}^  per  cents.,  and 
the  Pacific  railway  6s, — were  at  too  high  a  premium 
to  make  it  profitable  to  buy  them  as  a  basis  for  cir- 
culation. During  the  years  1884  and  1885,  when,  as 
we  have  seen,  the  process  of  debt  payment  ceased 
for  a  while,  the  decline  of  the  bank  circulation  natu- 
rally slackened  ;  but  when  the  improvement  in  the 
government's  financial  condition  made  it  possible  to 
resume  the  redemption  of  bonds,  the  decline  again 
set  in  sharply,  and  caused  a  rapid  contraction  of  the 
bank-notes. 

A  word  may  be  said  as  to  the  exact  mode  in  which 
the  contraction  of  the  note  issue  was  brought  about. 
The  provisions  of  the  national  banking  acts  permit 
a  bank  which  wishes  to  retire  its  circulation,  to  de- 
posit in  the  Treasury  lawful  money  to  the  amount  of 
its  notes  outstanding,  and  thereupon  to  receive  the 
bonds  held  as  security  for  the  notes.  The  liability 
of  the  bank  for  the  notes  thereupon  ceases,  the  gov- 
ernment assuming  the  obligation  to  pay  them.  The 
notes,  however,  may  remain  in  general  circulation 
for  some  time  after  the  bank  has  done  with  them, 
and,  in  fact,  are  likely  to  come  in  for  redemption 
only  so  fast  as  dirt  and  wear  render  them  unfit  for 
use.  The  Treasury,  meanwhile,  does  not  hold  the 
lawful  money  left  in  its  hands  by  the  banks  as  a 
special  deposit,  but  treats  it  as  part  of  its  general 
quick  assets.1     The  effects  of  this  process  have  been, 

1  Indeed,  the  silver  act  of  I  Sep,  presently  to  be  explained,  specifi- 
cally prescribed  that  "  the  balances  standing  with  the  Treasurer  of  the 


4o 


THE   ECONOMIC   SITUATION. 


on  the  one  hand  that  the  government's  nominal  hold- 
ings of  cash  have  been  considerably  swelled,  and  on 
the  other  hand  that  the  bank-notes  outstanding  have 
diminished  less  fast  than  the  banks  have  given  up 
their  circulation.  There  has  been  steadily  outstand- 
ing, during  the  last  ten  years,  a  considerable  amount 
of  bank-notes  which  we  may  call  doomed, — notes 
which  the  banks  have  given  up,  but  which  have  not 
yet  come  into  the  Treasury  for  payment  and  destruc- 
tion. In  the  foot-note  are  given  the  figures  for  re- 
cent years  as  to  the  gross  circulation  of  notes, — 
namely,  those  actually  in  use  by  the  public, — and  as 
to  the  net  circulation,  ascertained  by  subtracting 
from  the  gross  amount  the  money  deposited  by  the 
banks  with  the  Treasury.' 

United  States  to  the  respective  credits  of  national  banks  for  deposits 
made  to  redeem  the  circulating  notes  of  such  banks,  and  all  such 
deposits  received  hereafter  for  like  purpose,  shall  be  covered  into  the 
Treasury  as  a  miscellaneous  receipt,  and  the  Treasurer  of  the  United 
States  shall  redeem  from  the  general  cash  in  the  Treasury  the  circu- 
lating notes  of  said  banks  which  may  come  into  his  possession  subject 
to  redemption." 

1  National  bank-notes  outstanding  (in  millions  of  dollars) : 


Gross 
(total  outstanding). 

Net 

(less  lawful  money 

deposited). 

362.7 
352.0 
333-6 
315.8 
3°i-5 
272.0 
239.4 
202.0 
179-8 
172.2 
172.4 

324-3 
316  0 
291  8 
276.3 
2197 
169  2 

"      1883 

"       x884 

"       1885 

"       1886 

"       1887 

"       1888 

"       1889 

'36  7 
1 ,7.2 

During  the  years  1885-88  much  the  largest  part  of  the  lawful  money 
deposited  for  the  payment  of  notes  came  from  banks  which  were  re- 
ducing their  circulation  under  the  conditions  referred  to  in  the  text. 


i 886-1 890.  41 

Looking  at  the  gross  circulation,  which  represents 
the  notes  passing  from  hand  to  hand  in  the  commu- 
nity, we  find  a  diminution  of  one  hundred  and  twenty 
millions  between  1886  and  1890.  Our  bank-notes 
have  always  been  made  up  of  the  smaller  denomina- 
tions. Since  the  resumption  of  specie  payments, 
when  the  banks  were  no  longer  allowed  to  issue  new 
notes  of  less  than  five  dollars,  they  have  been  mainly 
in  denominations  of  five,  ten,  and  twenty  dollars. 
As  these  notes  disappeared,  a  void  was  made  in  the 
every-day  money  of  the  public,  and  a  place  so  made 
for  the  silver  certificates.  The  decline  in  the  bank- 
notes was  great  and  rapid  after  1886,  and  the  silver 
certificates  consequently  were  easily  absorbed  into 
the  circulating  medium. 

The  other  important  factor  in  the  situation  after 
1886  was  the  legislation  of  that  year  in  regard  to  the 
denominations  in  which  silver  certificates  could  be 
issued.  The  act  of  1878,  it  will  be  recalled,  had 
permitted  the  issue  of  certificates  only  in  denomina- 
tions of  not  less  than  ten  dollars.  The  circulation  had 
been  almost  exclusively  in  denominations  of  ten  and 
twenty  dollars;  and  the  limitation  to  these  denom- 
inations was  of  great  and  probably  unexpected  effect 
in  preventing  the  silver  currency  from  finding  its 
way  into  the  only  place  where  it  was  likely  to  stay, — 
in  the  every-day  money  of  the  people.  In  the 
general  appropriation  act  of  1886,  a  rider  was  in- 
serted in  the  appropriation  for  the  Bureau  of 
Kngraving,  authorizing  the  printing  of  certificates 
of  one,  two,  and  five  dollars.'  We  have  already 
seen   that  the  Secretary  of  the  Treasury  made  an 

1   Statutes  at  Large,  vol.  xxiv.,  p.  227  ;  June  30,  1886. 


42  THE   ECONOMIC   SITUATION. 

endeavor,  even  before  this  change  was  author- 
ized, to  promote  the  circulation  of  the  silver 
dollars,  first  by  cutting  down  the  number  of  legal- 
tender  notes  of  small  denominations,  finally  by  ceas- 
ing to  print  them  altogether.  Under  these  circum- 
stances, the  small  silver  certificates,  of  which  the 
issue  began  immediately  after  Congress  authorized 
them,  were  rapidly,  almost  eagerly,  absorbed  by  the 
public.  In  the  autumn  months  of  1886,  the  cer- 
tificates for  one,  two,  and  five  dollars  were  issued  as 
fast  as  they  could  be  printed. 

As  it  happened,  the  revival  of  business  activity 
became  more  pronounced  at  this  same  time,  and 
there  was  room  for  a  general  expansion  of  the  retail 
currency  of  the  community.  The  volume  of  silver 
currency  gained  almost  steadily  on  the  total  coinage 
of  the  dollars;  and  with  the  beginning  of  1889,  prac- 
tically all  the  dollars  coined  were  in  circulation, 
chiefly,  of  course,  in  the  form  of  certificates.  The 
increase,  it  need  hardly  be  said,  was  mainly  in  the 
certificates  for  one,  two,  and  five  dollars.  These 
small  certificates  took  the  place  of  small  United 
States  notes ;  while  the  decline  of  the  bank-note 
circulation  made  way  for  the  additional  amount  of 
larger  United  States  notes  issued  in  place  of  the 
small  ones  retired.  Withal,  there  was  a  steady 
growth  in  the  aggregate  amount  of  the  money  of 
these  denominations  used, — the  natural  result  of 
the  steady  growth  of  the  community  in  population 
and  wealth. 

We  may  summarize  the  results  of  the  changes 
described    in   the  preceding  pages  in  tables,   giving 


1 8  86- 1 890. 


43 


the  amount  of  large  change,  or  money  in  denomina- 
tions of  twenty  dollars  and  less,  outstanding  at  three 
important  dates, — at  the  close  of  the  fiscal  year  (June 
30)  in  1878,  1886,  and  1890.  To  these  is  added  a 
statement  of  the  same  sort  for  1892,  which  indicates 
the  changes  under  the  act  of  1890,  and  will  be 
referred  to  when  the  effects  of  that  measure  are 
taken  up.1 

[Figures  indicate  millions  of  dollars.] 


1878 

$1 

$2 

$5 

$10 

$20 

Total 

20.9 
4.0 

20.9 

2.8 

54-7 
93-9 

65.5 

IC4.1 

.1 

62.7 
68.6 

224.7 

273-4 
.  1 

•9 

-9 

Total 

25.8 

23.7 

148.6 

169.7 

I3I-3 

499.1 

1  The  figures  are  compiled  from  those  given  in  the  Reports  of  the 
Treasurer.  It  should  be  noted  that  silver  certificates  "  outstanding" 
here  include  certificates  which  have  been  paid  into  the  Treasury,  and 
are  held  by  the  Treasury  against  itself ;  to  this  extent  the  figures  do 
not  indicate  certificates  held  by  the  community.  In  recent  years,  the 
Treasury  cash  has  included  very  few  of  the  smaller  certificates,  and 
indeed  not  many  certificates  of  any  kind.  On  the  other  hand,  the 
Treasury  held  in  June,  1886,  nearly  twenty-eight  millions  of  certifi- 
cates, in  which  are  doubtless  included  a  considerable  number  of  the 
ten-  and  twenty-dollar  pieces  counted  in  the  text  as  in  circulation. 
The  real  increase  in  the  large  change  of  the  community  since  1886  has 
therefore  been  greater  than  the  figures  indicate. 

The  bank-notes  of  $1  and  $2  reported  as  outstanding  in  1SS6  and 
1890,  are  chiefly  notes  which,  having  been  lost  or  destroyed,  have  not 
been  presented  for  redemption.  They  are  therefore  only  nominally 
"  outstanding." 


44 


THE   ECONOMIC   SITUATION. 


1886 

$1 

$2 

$5 

$10 

$20 

Total 

17.6 
•4 

18.2 
.2 

8s. 6 
83-3 

66.6 
101.5 

50.3 

55-1 
73-0 
44.9 

243.1 

258.4 
95.2 

54-i 

54.1 

Total 

72.1 

18.4 

168.9 

218.4 

173.0 

650.8 

1890 

$1 

$2 

$5 

$IC 

$20 

Total 

U.  S.  notes 

Silver   certificates 

3-3 

•4 

3i- 1 

56.1 

2.9 

.2 

22.5 

57-7 

52.0 

102. 1 

90.4 

59-5 

in. 5 

in. 5 
45-5 
26.3 

265.8 
157.6 

293-5 
56.1 

Total 

90.9 

25.6 

211. 8 

261.4 

183.3 

773-Q 

1892 

$1 

$2 

$5 

$10 

$20 

Total 

Silver   certificates 

4.1 

•4 

27-3 

59-6 

5-5 

3-i 

.2 

17. 1 

61.6 

49-7 
106.4 

92.6 

54-5 
no. 6 

113. 2 

4i-3 
44.1 

274.6 

146. 1 

305-5 

59-6 

79-4 

Treas.notesofi890 

8.6 

23.2 

30.7 

11. 4 

Total 

96.9 

29.0 

240.9 

288.4 

210.0 

865.2 

It  will  be  seen  that  the  one-dollar  and  two-dollar 
notes,  which  in  1878  were  greenbacks  and  bank- 
notes, were  in  1890  almost  entirely  silver  certificates. 
There  is  a  very  striking  increase,  between    1878  and 


i 886- i 890.  45 

1890,  in  the  total  number  of  one-dollar  pieces  out- 
standing ;  but  this  increase,  so  far  as  actual  circula- 
tion goes,  is  in  some  part  more  apparent  than  real. 
A  large  part  of  the  silver  dollars  which  are  out  of 
the  Treasury  arc  not  in  use  as  money.  Some  are 
doubtless  hoarded  :  it  is  said  that  the  negroes  in  the 
South  have  hoarded  considerable  numbers.  Some 
have  been  melted  by  jewellers  and  others  for  use  in 
the  arts.'  Though  permanently  out  of  the  Treasury, 
the  fifty  or  sixty  millions  of  silver  dollars  are  prob- 
ably not  all  in  actual  monetary  use. 

In  the  larger  denominations,  the  proportion  of 
silver  certificates  grows  steadily  less.  They  formed 
in  1890  about  one  half  of  the  five-dollar  pieces,  two 
fifths  of  the  ten  dollars,  and  but  little  more  than  one 
sixth  of  the  twenty  dollars.  If  we  were  to  carry  the 
figures  to  the  higher  denominations,  we  should  find 
the  silver  currency  in  less  and  less  proportions.  They 
form  about  eight  per  cent,  of  the  fifty-dollar  notes 
"  outstanding,"  and  less  than  this  proportion  of  the 
one-hundred-dollar  notes.  In  the  denominations 
above  one  hundred  dollars,  their  use  is  insignificant, 
or  ceases  entirely.2 

1  It  may  seem  strange  that  jewellers  should  melt  silver  dollars, 
when  they  can  buy  with  them,  as  money,  20  or  25  per  cent,  more 
silver  bullion  than  the  dollars  contain.  No  doubt  large  manu- 
facturers are  careful  not  to  incur  such  a  loss.  But  a  jeweller  using 
silver  on  a  small  scale,  and  producing  an  article  whose  value  rests 
little  on  the  bullion  used,  and  chiefly  on  the  labor  put  into  fashion- 
ing it,  may  procure  his  silver  by  the  handy  process  of  melting  down  a 
dollar  or  two.  I  am  assured  by  Mr.  Leech,  the  Director  of  the  Mint, 
than  whom  there  could  be  no  better  informant,  that  this  takes  place 
to  no  inconsiderable  extent. 

2  See  the  figures  given  below,  at  p.  58. 


46  THE   ECONOMIC   SITUATION. 

The  whole  amount  of  money  in  these  denomina- 
tions was,  in  1890,  seven  hundred  and  seventy-three 
millions  of  dollars.  In  1878  it  was  very  nearly  five 
hundred  millions.  The  increase  in  twelve  years, 
therefore,  was  two  hundred  and  seventy-three  mil- 
lions. That  increase  came  chiefly  from  the  addition 
of  the  silver  dollars  and  certificates  to  the  circulating 
medium.  There  was  also  some  increase  in  the  use 
of  greenbacks  of  denominations  of  twenty  dollars  and 
less,  notwithstanding  the  great  shrinkage  of  the  one- 
and  two-dollar  notes.  In  1878,  the  greenbacks  of 
larger  denominations  were  used  more  than  they  are 
now,  being  held  by  banks  for  reserve  and  for  use  in 
clearing-house  payments.  Gold  has  taken  their  place 
in  large  part  for  these  purposes  ;  which  accounts  for 
the  increased  circulation  of  greenbacks  of  the  denom- 
inations of  five,  ten,  and  twenty  dollars.  The  gain 
in  silver  and  in  greenbacks  has  much  more  than  offset 
the  decline  in  the  bank-notes. 

Between  1878  and  1890,  then,  the  total  gain  in 
these  denominations  was  two  hundred  and  seventy- 
three  millions,  or  at  the  rate  of  between  twenty-five 
and  thirty  millions  a  year.  Between  1886  and  1890 
the  gain  was  at  the  rate  of  fully  thirty  millions  a  year. 
That  sum  probably  represents  the  amount  of  money 
for  every-day  use  which  is  called  for  each  year  by 
the  regular  increase  of  population  and  wealth.  A 
figure  not  varying  much  from  this  is  reached  if  we 
calculate  the  annual  increment  in  another  way.  The 
total  amount  in  1890  was  seven  hundred  and  seventy- 
three  millions.  To  this  should  be  added  the  gold  in 
general  use,  while  a  deduction  should   be   made  for 


i 886- i 890.  47 

the  silver  dollars  which  are  outstanding,  but  not  in 
use  as  money.  As  to  the  gold  in  the  country,  there 
are  some  perplexing  questions,  to  which  allusion  will 
be  made  at  a  later  stage  of  this  discussion.  But  it 
is  certain  that,  except  on  the  Pacific  coast,  gold 
appears  but  rarely  in  every-day  use.  Ample  allow- 
ance will  certainly  be  made  for  the  gold  which  is  in 
every-day  circulation  if  we  put  it  at  one  hundred 
millions  or  thereabouts.  In  other  words,  we  shall 
probably  err  on  the  side  of  excess  if,  to  allow  for  the 
gold  in  use,  we  raise  the  sum  of  seven  hundred  and 
seventy-three  millions,  as  just  reckoned,  to  the  round 
sum  of  nine  hundred  millions,  and  name  the  latter 
amount  as  the  total  volume  of  money  used  in  denom- 
inations of  twenty  dollars  or  less.  This  would  mean 
for  a  population  of  sixty-two  millions  about  fifteen 
dollars  a  head.  The  occasion  for  the  use  of  money 
of  this  kind  increases  with  the  growth  of  population  ; 
not  indeed  in  any  exact  correspondence,  with  a  check 
at  one  time  and  a  rapid  start  at  another,  yet  on  the 
whole  in  a  rough  proportion  to  the  increasing  num- 
bers of  the  community.  If  the  population  grows 
each  year  at  a  rate  of  between  1,300,000  and  1,500,- 
OOO,  we  shall  have  room  for  an  increase,  in  round 
numbers,  of  about  twenty  million  dollars  a  year  in 
the  money  for  every-day  use. 

Calculations  of  this  sort  are  always  uncertain,  and 
the  results  just  reached  cannot  pretend  to  anything 
but  a  rough  approximation  to  the  truth.  But  they 
rest  on  a  fairly  secure  basis  of  fact,  and  certainly 
help  in  giving  an  answer  to  the  question  which  has 
often  been  asked  in  recent  years :  How  much  addi- 


48  THE    ECONOMIC   SITUATION. 

tional  money  can  be  used  and  absorbed,  under 
existing  conditions,  by  a  country  growing  as  rapidly 
as  the  United  States?  Those  channels  of  circulation 
in  which  alone  the  silver  currency  issued  under  the 
act  of  1878  succeeded  in  making  its  way, — those, 
we  may  add,  in  which  it  is  comparatively  harmless, 
so  far  as  the  maintenance  of  the  gold  standard  is 
concerned, — will  take  up  twenty  or  thirty  millions  a 
year.  In  other  words,  so  much  additional  money, 
in  denominations  of  twenty  dollars  and  less,  might 
be  put  forth  by  the  government  year  by  year,  and 
would  find  a  steady  and  permanent  use.  In  years  of 
depression  like  1884-85,  it  would  make  its  way  into 
circulation  sluggishly ;  in  years  of  great  activity  like 
1880-81,  more  could  be  easily  absorbed  ;  but  the 
average  would  be  somewhere  near  the  figures  just 
stated.  It  appears,  then,  that  the  issue  under  the 
act  of  1878  was  not  on  the  whole  excessive.  By 
a  lucky  accident,  it  corresponded  with  sufficient 
closeness  to  what  the  community  was  in  a  position 
to  use  for  its  growing  transactions. 


VI. 

The  Act  of  1890. 

We  have  now  completed  the  history  of  the  first 
three  periods  in  the  silver  situation,  and  may  proceed 
to  consider  the  fourth  and  last,  in  the  midst  of  which 
we  now  are  (January,  1893).  The  act  of  July  14, 
1890,  repealed  the  silver  act  of  1878,  and  so  brought 
to  a  close  the  precise  experiment  tried  under  that 
measure.  The  new  experiment  has  been  in  progress 
but  a  short  time,  and  any  discussion  of  its  working 
must  therefore  be  provisional.  But  the  new  act, 
notwithstanding  some  important  differences,  con- 
tinued in  essential  points  the  policy  of  its  predecessor, 
so  that  the  working  of  the  latter  throws  light  on  the 
events  of  the  years  just  elapsed  and  on  those  to  be 
expected  in  the  future. 

The  act  of  July  14,  1890,  is  even  more  remarkable 
than  that  of  1878.  It  is  unique  in  monetary  history. 
It  provides  that  the  Secretary  of  the  Treasury  shall 
purchase  each  month  at  the  market  price  four  and  a 
half  million  ounces  of  silver  bullion.  In  payment 
he  shall  issue  Treasury  notes  of  the  United  States, 
in  denominations  of  between  one  dollar  and  one 
thousand  dollars.  These  Treasury  notes,  unlike  the 
old  silver  certificates,  are  a  direct  legal  tender  for  all 
debts,  public  or  private,  unless  a  different  medium  is 

4  49 


50  THE    ECONOMIC    SITUATION. 

expressly  stipulated  in  the  contract.  They  differ 
from  the  silver  certificates  in  another  respect  ;  they 
arc  redeemable  either  in  gold  or  silver  coin,  at  the 
discretion  of  the  Secretary  of  the  Treasury.  The 
indirect  process  of  redemption  which,  as  we  have 
seen,  was  applied  to  the  silver  certificates,  is  replaced 
for  the  new  notes  by  direct  redemption.  The  avowed 
object  is  to  keep  the  silver  money  equal  to  gold,  for 
it  is  declared  to  be  "  the  established  policy  of  the 
United  States  to  maintain  the  two  metals  at  a  parity 
with  each  other  on  the  present  legal  ratio,  or  such 
ratio  as  may  be  provided  by  law."  The  act  of  1878 
is  repealed  ;  but  the  coinage  of  two  million  ounces 
of  silver  into  dollars  is  to  be  continued  for  a  year 
(until  July  I,  1891).  Thereafter  it  is  directed  that 
only  so  many  silver  dollars  shall  be  coined  as  may  be 
needed  for  redeeming  any  Treasury  notes  presented 
for  redemption.  Practically,  this  means  that  the 
coinage  shall  cease  ;  redemption  in  silver  dollars' will 
not  be  called  for.  The  coinage  of  silver  dollars  ac- 
cordingly was  suspended  by  the  Treasury  on  July  1, 
1 89 1  ;  a  change  which  was  the  occasion  of  some 
vociferous  abuse  and  equally  vociferous  praise,  but 
which  in  reality  was  of  no  consequence  whatever. 

The  monthly  issues  of  the  new  Treasury  notes 
vary,  like  those  of  the  old  silver  certificates,  with 
the  price  of  silver.  But  the  new  issues  vary  directly 
with  the  price  of  silver,  while,  as  we  have  seen,1 
the  old  issues  varied  inversely  with  the  price.  The 
volume  of  Treasury  notes  issued  is  equal  to  the 
market  price  of  four  and  one  half  million  ounces  of 
1  See  p.  3. 


THE   ACT    OF    189O.  5 1 

silver.  If  silver  sells  at  $1.20  an  ounce,  the  monthly 
issue  of  notes  will  be  $5,400,000;  if  at  $1.00  an 
ounce,  $4,500,000.  For  a  month  or  two  after  the 
passage  of  the  act,  the  price  of  silver  advanced  rap- 
idly, and  at  its.  highest,  in  August,  1890,  touched 
$1.21.  But  the  rise  proved  to  be  but  temporary. 
After  September  a  steady  decline  set  in,  and  con- 
tinued almost  without  interruption  through  the  rest 
of  1890,  through  i89i,and  through  1892.  The  year 
1891  opened  with  silver  at  a  price  of  about  $1.00  an 
ounce  ;  by  the  close  of  the  year  the  price  had  fallen 
to  about  95  cents.  In  1892  a  still  further  and  more 
marked  decline  set  in,  and  by  the  close  of  the  year 
the  price  had  gone  as  low  as  85  cents. 

This  unmistakable  decline,  in  face  of  the  increased 
purchases  of  the  United  States,  was  surprising  both 
to  those  who  advocated  and  those  who  opposed  the 
efforts  to  enlarge  the  monetary  use  of  silver.  It 
was  at  first  ascribed  to  temporary  causes  acting  dur- 
ing 1890-91,  and  especially  to  some  shrinkage  in  the 
demand  for  silver  for  shipment  J;o  India  and  the 
East.  But  the  continuance  of  the  fall  indicated  that 
it  was  due  to  permanent  causes, — the  steady  increase 
in  the  product  of  the  mines,  and  the  marketing  of 
more  silver  bullion  than  could  be  disposed  of  with- 
out a  fall  in  its  price.  At  all  events,  it  became  obvi- 
ous that  the  act  of  1890  had  failed  to  secure  one 
result  which  had  in  some  quarters  been  expected, — 
the  rise  of  silver  to  "  par,"  that  is,  to  the  price  of 
$1.29  an  ounce,  at  which  the  market  value  would 
correspond  to  the  coinage  value.  At  that  price,  the 
silver  dollar   is  not  depreciated   as  compared  with 


52  THE   ECONOMIC    SITUATION. 

gold,  and  the  silver  problem  may  be  plausibly  said 
to  have  solved  itself,  at  least  for  the  United  States. 
But  clearly  this  solution  was  not  reached,  and,  it  is 
now  certain,  will  not  be  reached,  under  the  act  of 
1890.  In  this  regard,  the  measure  proved  a  com- 
plete and  unmistakable  failure. 

The  fall  in  the  price  of  silver  brought  with  it 
another  unexpected  result.  The  issue  of  new 
currency  under  the  act  of  1890  was  appreciably  less 
than  had  been  expected.  At  a  price  of  $1.00  an 
ounce,  the  yearly  issue  of  notes  would  be  $54,- 
000,000;  at  a  price  of  85  cents,  the  yearly  issue 
would  be  about  $46,000,000.  In  fact,  the  issues  dur- 
ing the  years  1891  and  1892  were  at  the  rate  of  about 
$50,000,000  a  year.1  For  the  future,  they  seem 
likely  to  be  in  smaller  volume,  and,  if  the  price  of 
silver  continues  to  fall,  in  considerably  smaller  vol- 
ume. The  experience  of  the  last  twenty  years 
indicates  that,  so  far  as  it  is  safe  to  make  any  predic- 
tions as  to  the  price  of  silver,  the  probabilities  are 
that  it  will  fall  still  further.  If  the  price  continues 
to  fall  as  rapidly  as  it  did  in  1891-92,  the  point  will 
before  long  be  reached  at  which  the  issues  under  the 
act  of  1890  will  be  no  greater  than  they  would  have 
been  if  the  act  of  1878  had  remained  in  force.  At  a 
price  of  about  75  cents  an  ounce,  the  annual  issue 
under  cither  act  would  be  the  same,— in  round  num- 
bers, forty  millions  a  year.  At  a  lower  price,  the  act 
of  1890  would  bring  actually  smaller  issues  than  that 
of  1878. 

1  The  issues  of  Treasury  notes  were  : 
During  the  fiscal  year  1890-91   (11  months)  .  50.2  millions. 

"  "        "         "     1891-92        ....  50.6         " 


THE   ACT    OF    189O.  53 

In  any  case,  however,  we  must  expect  for  some  years 
to  come  a  much  greater  issue  of  silver  currency  than 
the  terms  of  the  earlier  legislation  and  the  price  of 
silver  brought  in  the  years  before  1890.  The  annual 
increment  will  probably  be  between  forty  and  fifty 
millions.  And  this  increase  in  amount  is  the  most 
important  change  in  the  situation  from  the  new  meas- 
ure. The  method  of  making  the  addition  to  the 
currency  is  different,  and  the  Treasury  notes  of  1890 
are  different  in  externals  and  in  some  legal  respects 
from  the  silver  certificates  of  1878  ;  but  the  important 
difference  for  the  community  arises  from  the  fact 
that  their  quantity  is  greater. 

One  other  change  in  the  currency  situation  after 
1890  must  be  noted.  The  decline  in  the  volume  of 
the  national  bank-notes  ceased  for  the  time  being. 
As  a  reference  to  the  figures  given  above  (page  40) 
will  show,  the  gross  circulation  remained  very 
nearly  stationary  after  1890.  With  the  causes  of 
this  change  we  are  not  here  concerned  ;  it  suffices  to 
point  out  that  in  this  direction  no  room  was  made 
for  an  increasing  circulation  of  silver  currency.  In 
the  absence  of  further  legislation  by  Congress,  it  is 
probable  that  some  decline  in  the  bank-notes  will 
again  take  place  in  the  future;  but  it  will  .  roceed 
slowly,  and  cannot  again  be  a  factor  of  such  im- 
portance in  the  silver  situation  as  it  was  in  the  years 
1885-89. 

We  may  proceed  now  to  some  account  of  the 
manner  in  which  the  act  of  1890  worked  in  the 
first  years  after  its  passage.  So  far  as  the  volume 
of  the  silver  currency  in  actual  circulation  goes,  the 
situation  was  simple  ;  practically  all  of  it  went  out. 


54  THE   ECONOMIC   SITUATION. 

In  the  same  session  in  which  the  silver  act  was 
passed  in  1890,  Congress,  by  the  tariff  act  of  that 
year,  made  a  sharp  reduction  in  the  public  rev- 
enues, chiefly  by  removing  the  duty  on  sugar.  At 
the  same  time  appropriations  and  expenses  were 
increased.  Consequently,  the  receipts  exceeded  the 
expenditures  by  very  little,  if  anything,  and  the 
Treasury  was  not  in  a  position  to  hoard  silver 
currency,  even  though  it  tended  to  accumulate  in  its 
tills.  As  it  happened,  some  events  of  the  fall  of 
1890,  presently  to  be  described,  caused  the  Treasury 
to  make  large  disbursements,  which  drained  away 
the  surplus  then  on  hand.  The  Treasury  after  the 
passage  of  the  act  of  1890  had  no  considerable  work- 
ing surplus  ;  it  has  had  to  pay  out  all  that  it  took  in. 
The  volume  of  silver  currency,  therefore,  expanded 
steadily  after  the  passage  of  the  act  of  1890.  On 
the  chart,  the  reader  will  note  how  the  unbroken 
line  indicating  the  total  silver  currency  makes  a 
distinct  angle  at  the  date  when  the  act  went  into 
effect  (Aug.  14,  1890).  It  soars  rapidly  upward, 
marking  the  greater  issues.  The  dotted'  line  indi- 
cating the  silver  currency  outstanding  responds  to 
the  upward  movement,  with  some  irregularities,  it  is 
true,  but  on  the  whole  with  close  correspondence. 
The  same  movement  took  place  in  the  year  1892, 
which  the  chart  does  not  cover.  About  one  hun- 
dred and  twenty-five  millions  of  the  new  Treasury 
notes  were  added  to  the  circulating  medium  between 
mid-summer  of  1890  and  the  close  of  1892;  and 
practically  all  of  this  enormous  amount  went  into 
actual  circulation. 


THE   ACT   OF    189O.  55 

The  bulk  of  the  addition  to  the  currency  naturally 
took  the  form  of  the  smaller  denominations.  Turn- 
ing back  to  the  figures  given  on  pages  43  and  44,  the 
reader  will  observe  the  great  increase  in  the  quantity 
of  money  in  denominations  of  twenty  dollars  and  less. 
Between  the  middle  of  1890  and  of  1892,  the  decline 
in  the  national  bank  circulation  having  almost 
ceased,  the  new  issues  brought  an  addition  to  the 
volume  of  large  change  amounting  to  over  ninety 
million  dollars  in  two  years.  But  it  will  also  be 
observed  that  not  all  the  issues  of  Treasury  notes 
have  been  in  the  smaller  denominations;  for  reasons 
presently  to  be  set  forth,  a  considerable  portion  of 
the  new  issues  was  in  denominations  of  over  twenty 
dollars. 

On  the  other  hand,  a  very  striking  change  took 
place  in  this  period  in  the  extent  of  the  Treasury 
gold  reserve.  Before  the  period  of  financial  embar- 
rassment in  1885,  the  gold  reserve  had  risen  rapidly, 
and  from  1887  to  1890  had  been  over  one  hundred 
and  eighty  millions  of  dollars.  But  in  August  of 
1890,  some  heavy  disbursements  by  the  Treasury 
caused  a  loss  of  some  forty  millions ;  and  in  the 
spring  of  1891,  there  ensued  a  further  great  decline, 
bringing  the  reserve  by  mid-summer  of  1891  to  one 
hundred  and  seventeen  millions.  From  that  great 
loss  the  Treasury  did  not  recover  through  1891  and 
1892.  Some  significant  gains  and  losses  took  place, 
presently  to  be  noted  ;  but  the  reserve  settled  to  a 
very  much  lower  range,  standing  sometimes  above, 
sometimes  below  a  sum  of  about  one  hundred  and 
twenty  millions.     The    change    was   great,  and   ap- 


56  THE   ECONOMIC   SITUATION. 

parently  permanent.  While  the  volume  of  cur- 
rency resting  on  the  gold  reserve  increased  heavily, 
the  reserve  itself  went  to  a  definitely  lower  level.1 

Another  change  took  place  during  this  same 
period,  not  shown  on  the  chart,  but  closely  con- 
nected with  the  decline  in  the  Treasury  gold, — a 
change  in  the  character  of  the  money  taken  in  by 
the  government  for  taxes.  The  receipts  from  cus- 
toms at  the  port  of  New  York  indicate  the  nature  of 
this  change.  Since  1885,  when,  it  will  be  remem- 
bered, the  gold  receipts  showed  an  ominous  decline, 
the  payments  on  account  of  customs  had  been  almost 
exclusively  in  gold  ;  and  they  so  continued  during 
the  first  half  of  1890.  The  figures  in  the  note  show 
that  in  the  fall  of  1890  there  was  a  distinct  drop  ; 

1  The  net  amounts  of  gold  held  by  the  Treasury  were,  in  millions  of 

dollars,  at  the  close  of  the  months  mentioned: 

1890  1891 

January '77-3  January 141.7 

February 187.9  February 149-7 

March 185.2  March 148. 1 

April 186.2  April 141.7 

May 1905  May '33-2 

June 190.2  June 117.6 

July 184.0  July 121. 1 

August 185.8  August 132.4 

September 147-9  September 132.5 

October 156-3  October 1276 

November 1624  November 129. 1 

December 148.9  December , 130.7 

1892. 

January "9-5 

February 122. 1 

March  125.8 

April 1199 

May  114. 2 

<  June 114.3 

July no. 4 

August 114. 1 

September 119.3 

October 124.0 

November 124. 4 

December 121.2 

1893 
January 108. 1 


THE   ACT   OF    189O.  57 

then  a  recovery  at  the  close  of  the  year  ;  followed  in 
the  first  half  of  1 891  by  an  almost  complete  collapse. 
The  percentage  of  gold  in  the  customs  receipts  fell 
to  60,  40,  and  during  the  summer  months  to  20  and 
10  per  cent.  Legal-tender  notes  of  the  old  and 
of  the  new  issues  formed  by  far  the  greater  part  of 
the  receipts.  In  the  fall  of  1 891  there  was  again  a 
revival  of  the  gold  inflow,  the  receipts  going  up  to 
65  and  66  per  cent,  in  December  of  1891  and  Janu- 
ary of  1892.  The  improvement  in  this  season  was 
to  be  expected  ;  the  westward  movement  of  cash  in 
the  later  months  of  the  year  usually  carries  off  the 
various  forms  of  paper  money,  and  gold  remains  for 
the  customs  payments  to  the  Treasury.  As  we  shall 
presently  see,  the  conditions  of  the  fall  of  1891  might 
have  been  expected  to  bring  about  an  even  greater 
use  of  gold  in  the  customs  payments.  The  gain, 
however,  was  but  partial  and  of  very  short  duration. 
After  January  of  1892  there  was  a  second  and  more 
complete  breakdown.  Gold  receipts  again  began 
rapidly  to  shrink,  and  in  a  few  months  virtually  dis- 
appeared. In  the  second  half  of  1892,  practically  no 
gold  was  taken  in  ;  between  eighty  and  ninety  per 
cent,  of  the  receipts  were  in  legal-tender  notes.  The 
change  was  much  more  striking  than  that  of  the 
period  of  embarrassment  in  1885  ;  the  collapse  of 
gold  receipts  at  New  York  was  complete.1 

1  The  following  table  shows  the  monthly  receipts  for  customs  at 
New  York  in  the  years  1890,  1891,  and  1892,  and  the  percentage  of 
the  various  kinds  of  money  received.  Gold  and  silver  coins,  it  should 
be  said,  form  only  insignificant  items  ;  practically  all  the  specie 
receipts,  as  stated  in  the  second  and  third  columns,  are  in  gold  and 
silver  certificates. 


58 


THE    ECONOMIC   SITUATION. 


Under  these   circumstances,  the   Treasury   must 
have  been  brought  to  serious  embarrassment  if  the 


1890. 

January 

February 

March 

April 

May 

June 

July 

August 

September. . . . 

October , 

November. . . . 
December. . . . 

1S91. 

January 

February 

March 

April 

May 

June 

July 

August 

September. . . . 

October 

November. . . . 
December. . . . 

1892. 

January 

February 

March 

April 

May 

June 

July 

August 

September. . . , 

October 

November. . . . 
December. . . . 

1893. 

January 


15.2 
i3-8 

12-5 

13.6 
10.6 
14.4 
17.1 
12.9 
'5-7 
16.0 
10. 1 
10.7 


16.7 

13. 2 
IO.5 

7-7 
7  4 
9.1 

n-3 
10.4 
9.9 

9-3 
8.5 

9-3 


S  «  V 
§3* 


88.6 
81. 1 
65.2 
47.2 
28.0 
12. s 
15.1 

12.8 

11. 8 
20.0 
43.6 

65.4 


25.9 
18.8 

•5  > 

10. 0 
8.2 

13.9 

12. 1 
36 
6.7 
7  9 
4-4 


8.9 


o£u 


2   I 

6.6 
16.5 
20.0 
26.8 
14.0 

8.5 

5'2 

4  4 
4.4 
2.8 
3-1 


4-3 
9-3 
5-7 
6.9 
13  o 
15-9 
'5-5 
10  4 
10  9 
6.4 
6.3 
9.2 


15.8 


o  r 
2o 


4.6 
3  ° 


4.1 
.  5° 
6.0 
7.2 
15° 
44.6 
49.0 
50-5 
S5-3 
44.0 
31.3 
14.8 


15.0 
36.2 
42.5 

464 
40.6 
26.8 
28.4 
25-6 
45.8 

5'-9 
52.8 
46.4 


3-S 
11.0 
•55 
14.6 

6.9 


5-2 
7-3 

12.4 
25.6 
30.2 
28.9 
27-4 
3'-5 
28.4 
31.6 
22.3 
16.7 


'4-5 
28.6 
33.0 
31.6 

36- 4 
49.1 
42.2 
Si-9 
397 
35.0 
330 
40  o 


THE   ACT   OF    189O.  59 

notes  of  1890  had  stood  in  the  financial  community 
on  the  same  ground  as  the  silver  certificates.  But, 
fortunately  for  the  Treasury,  an  important  change 
took  place  from  the  situation  as  it  was  before  1890, 
in  the  mode  in  which  the  banks  dealt  with  the  new 
issues.  Shortly  after  the  passage  of  the  act,  some 
sort  of  understanding  seems  to  have  been  reached 
between  the  Treasury  department  and  the  banks  of 
New  York.  The  banks  came  to  an  agreement  that 
the  new  notes  were  to  be  treated  as  "  current  funds," 
receivable  in  all  payments,  clearing-house  settlements 
included.  No  doubt  the  fact  that  they  were  given 
the  legal-tender  quality,  and  were  made  directly 
redeemable  in  gold  on  demand,  had  something  to  do 
with  this  change  of  policy.  There  is  no  ground  for 
any  distinction  between  the  Treasury  notes  based 
on  silver  purchases,  and  the  old  United  States  notes, 
or  greenbacks  ;  both  sorts  of  notes  being  legal  ten- 
der, and  both  direct  claims  on  the  Treasury  gold 
reserve.  But  the  willingness  of  the  banks  to  accept 
the  new  notes  freely  is  also  to  be  ascribed  to  their 
disposition  to  throw  no  obstacle  in  the  way  of  the 
Treasury  in  its  action  under  the  new  regime.  The 
experiment  of  trying  to  keep  the  large  issues  of  1890 
at  par  with  gold  therefore  tried  under  conditions 
more  favorable  than  those  under  which  the  old  silver 
issues  were  put  forth. 

This  change  proved  of  great  importance.  The 
Treasury  notes  of  1890  have  been  used  in  large  and 
increasing  proportion,  both  in  payments  by  the  New 
York  sub-Treasury  to  banks  and  in  clearing-house 
settlements  between  banks.     The  figures  in  the  note 


6o 


THE    ECONOMIC   SITUATION. 


show  that  the  sub-Treasury  in  New  York  in  1890 
had  made  practically  all  of  its  payments  in  gold. 
But  in  1 89 1  gold  was  used  in  only  two  thirds  of  its 
payments,  and  in  1892  in  but  two  fifths.  A  similar 
change  took  place  in  the  cash  used  by  banks  in 
clearing-house  settlements  between  themselves. 
There  gold  was  displaced  in  very  nearly  the  same 
proportion,  being  used  for  65  per  cent,  of  the  pay- 
ments in  1891,  and  for  but  42  per  cent,  in  1892. 
Evidently  the  two  forms  of  legal-tender  notes,  and 
especially  those  of  the  issue  of  1890,  travelled  to 
and  fro  between  the  banks  and  the  Treasury.  The 
government  paid  them  out  to  the  banks  in  settle- 
ment of  the  balances  against  it  at  the  clearing-house  ; 
from  the  banks  they  worked  their  way  back  again 
into  the  sub-Treasury  in  the  form  of  customs 
receipts.  Meanwhile,  as  between  banks,  they  passed 
in  settlement  of  clearing-house  balances,  with  an 
evident  tendency  to  drift  before  long  into  the  sub- 
Treasury  vaults,  thence  to  start  again  on  the  round 
trip.1 

1  From  the  reports  of  the  Comptroller  of  the  Currency  it  appears 
that  the  payments  by  the  New  York  sub-Treasury  to  the  clearing- 
house banks  have  been  with  money  as  follows  : 


Amounts. 
(In  Millions). 

Per  Cent. 

1890. 

1891. 

1892. 

1890. 

97-7 
'•7 
.6 

1891. 

1892. 

Gold 

249.6 
4  5 
1  3 

255-4 

I38-7 
41. 1 
25.0 

83-4 
75-3 
47-9 

206.6 

67.7 
20.1 
12.2 

4°-3 
36.4 

23-3 

Treasury  Notes  of  1800 

Total 

204.8 

THE   ACT   OF    189O. 


6l 


The  use  thus  made  of  the  new  notes  caused  a 
change,  such  as  might  be  expected,  in  the  denomi- 
nations in  which  they  were  issued.  For  the  purposes 
of  the  sub-Treasury  and  the  New  York  banks,  large 
denominations  were  convenient.  Consequently  a 
considerable  proportion  of  them  were  issued  in 
denominations  of  one  hundred  and  one  thousand 
dollars  ;  offering  in  this  regard  a  marked  contrast  to 
the  silver  certificates.  In  addition,  the  Treasury 
was  called  on  during  1891  and  1892  to  furnish  in 
larger  quantities  than  before  "  currency  certificates," 
which  are  virtually  legal-tender  notes  of  very  large 
denominations.  These  are  issued,  for  sums  of  $5,000, 
and  $10,000,  on  the  deposit  of  legal-tender  notes  in 
the  Treasury,  in  the  same  manner  as  gold  and  silver 
certificates  are  issued  on  the  deposit  of  specie  ;  and 
they  form  virtually  legal  tenders  of  large  denomi- 
nations. Since  the  resumption  of  specie  payments 
they  have,  as  a  rule,  been  but  sparingly  used.  But 
in  1885  their  issue  had  increased;  and  in  1891  and 
1892  it  increased  again.  In  both  cases  the  changes 
were  part  of  a  series  of  phenomena,  all  indicating  a 


With  these  general  figures  may  be  compared  the  statement  by 
months  given  in  the  Treasurer's  report  for  1892,  Appendix  No.  26. 

From  the  Comptroller's  report  it  appears  that  the  balances  between 
banks  have  been  settled  thus  (the  figures  again  indicate  millions)  : 


Year  Ending  Oct. 


Gold 

Treasury  Notes  of  1890 

Treasury  Legal  Tender  Certificates.. 
Legal  Tenders  and  Change 

Per  Cent,  of  Gold  in  Total  Payments 


1890 


1.735-3 

1,0   -.4 

6.9 

102.4 

5° 

353-5 

5-8 

100.2 

1891 


1892 


791.0 

357-3 
483.3 

220.2 


•4* 


64.9  £ 


42-5  % 


62  THE   ECONOMIC   SITUATION. 

redundancy  of  the  total  volume  of  the  paper  and 
silver  currency.1 

Such  were  the  salient  facts  in  the  currency  situa- 
tion in  the  years  immediately  following  the  passage 
of  the  act  of  1890.  For  their  better  understanding 
some  account  may  be  given  of  the  chief  events  of 
this  period. 

The  first  issues  of  the  Treasury  notes  were  made 
in  the  latter  half  of  August,  1890.  In  that  part  of 
the  year  an  upward  movement  in  the  silver  currency 
in  circulation  generally  begins.  The  autumn  months 
bring  a  flow  of  currency  to  the  West,  and  it  was  to 
be  expected  that  during  this  first  stage  there  would 
be  no  difficulty  in  getting  the  new  notes  in  circula- 
tion. The  regular  expansion  of  the  silver  currency 
accordingly  took  place. 

1  The  following  figures  give,  in  millions,  the  denominations  out- 
standing of  the  Treasury  notes  of  1890  and  of  the  silver  certificates, 
on  June  30,  1892. 


Notes. 

Treasury  Notes  of 

1890. 

Sil 

/er  Certificates. 

$       t 

5-5 

27-3 

2 

8.6 

17.1 

5 

23.2 

106.4 

10 

30.7 

1 10.6 

20 

11.4 

44.1 

5° 

.... 

11.7 

100 

10.0 

15.8 

5°° 

1.2 

1,000 

11. 4 

1-4 

Total,        100.8  335.6 

Over  twenty  per  cent,  of  the  Treasury  notes  were  in  denominations 

of  $100  and  over  ;  only  about  five  per  cent,  of  the  silver  certificates. 
The  currency    certificates    outstanding   (all    in    denominations  of 

$5,000  and  $10,000)  were  : 

June  30,   18 


80 

M  3 

trillions. 

June  30, 

1887 

9.0 

millions. 

81 

11. 6 

" 

88 

14.9 

<fc 

8a 

13  4 

" 

89 

17.2 

83 

13-2 

14 

90 

12.4 

* 

s  + 

12  2 

" 

9' 

23  8 

85 

29.3 

" 

92 

30.4 

k* 

86 

18.1 

ifc 

THE   ACT   OF    1 890.  63 

In  November,  1890,  came  an  event  which  had 
important  and  unexpected  effects  on  the  Treasury 
as  well  as  on  the  community:  the  collapse  of  the 
great  banking  house  of  Barings,  which,  though  it  led 
to  no  acute  panic,  brought  about  many  of  the  phe- 
nomena characteristic  of  a  commercial  crisis.  At 
first,  there  was  the  call  for  ready  cash  which  is  usual 
under  such  circumstances.  Bankers  and  others  having 
heavy  demand  liabilities  desired  to  increase  their 
holdings  of  money,  and  the  New  York  banks,  in 
which  the  central  reserve  of  the  banks  of  the  United 
States  is  kept,  resorted  to  those  expedients  in  the 
way  of  strengthening  their  reserves  which  experience 
has  shown  to  be  effective  safeguards  against  acute 
panics.1  The  Treasury  exerted  itself  also  to  tide 
over  the  emergency  by  paying  out  cash  liberally,  not 
only  in  its  ordinary  disbursements,  but  by  the  pre- 
payment of  interest  on  bonds.  The  very  heavy 
payments  which  the  Treasury  then  made  account 
for  the  decline  of  its  gold  reserve  in  the  fall  of  1890, 
to  which  attention  was  directed  a  moment  ago.  The 
disposition  of  banks  in  the  interior  to  call  back  some 
part  of  their  reserves  from  New  York,  combined 
with  the  usual  westward  movement  of  currency, 
tended  to  carry  the  various  forms  of  paper  money 
away  from  New  York.  Consequently  there  was  no 
accumulation  of  paper  and  silver  currency  in  that 
centre,  and  the  receipts  at  the  New  York  custom- 
house continued  to  be  chiefly  in  gold. 

1  As  to  the  methods  resorted  to  in  the  fall  of  1890,  as  well  as  at 
earlier  dates,  see  the  chapter  on  "  Combined  Reserves"  in  Professor 
Dunbar's  Theory  and  Practice  of  Banking. 


64  THE   ECONOMIC   SITUATION. 

In  the  beginning  of  1891  the  situation  began  to 
change.  The  first  stage  of  anxious  uncertainty 
being  over,  money  was  no  longer  kept  on  hand  in 
unusual  amounts  by  banks  and  financial  institu- 
tions through  the  country,  and  tended  to  return  to 
the  metropolis.  With  some  general  depression  in 
business  operations,  cash  in  the  hands  of  banks 
tended  still  more  to  become  redundant,  and  to  make 
its  way  to  the  central-reserve  depositories.  The  re- 
turn of  the  currency  which  had  gone  to  the  West 
and  South  in  the  autumn  months  increased  the  flow. 
Meanwhile  the  monthly  issue  of  Treasury  notes  was 
steadily  augmenting  the  supply  which  sought  to 
make  its  way  into  general  circulation.  The  Treasury, 
no  longer  in  the  fortunate  position  of  having  an  ex- 
cess of  receipts  over  expenditures,  was  unable  to  do 
what  had  been  done  in  1885, — collect  and  hoard  the 
silver  currency  as  it  came  into  its  hands.  On  the 
contrary,  certain  large  payments  of  this  time,  notably 
those  called  for  by  the  act  passed  in  1890  for  re- 
funding to  the  States  the  direct  tax,  were  made  in 
silver  certificates. 

The  outcome  of  the  situation  was  that  in  the  first 
half  of  1891  there  was  a  marked  accumulation  of 
the  various  forms  of  paper  money  in  the  New  York 
banks,  and  with  it  a  back-flow  of  silver  and  paper 
money  into  the  Treasury.  The  cash  holdings  of  the 
New  York  banks  normally  increase  in  the  spring  and 
summer,  and  decline  again  in  the  autumn.  But  at 
this  time  the  mid-summer  holdings  of  the  various 
forms  of  paper  were  exceptionally  large.  As  paper 
and  silver  currency  accumulated  in  the  tills  of  the 


THE   ACT   OF    189O. 


65 


banks,  it  was  used  by  preference  in  making  pay- 
ments to  the  Treasury.  Gold  receipts  for  customs 
at  New  York  practically  disappeared  ;  legal  tenders 
of  the  old  and  new  issues  formed  the  bulk  of  the 
cash  taken  in  by  the  Treasury.  These  legal  tenders 
were  again  paid  out  by  the  Treasury  to  meet  the 
balances  against  it  at  the  clearing-house;  and  so 
began  that  greater  use  of  paper  in  clearing-house 
settlements  of  all  sorts  to  which  reference  has  al- 
ready been  made.1 

1  The  holdings  of  specie  and  legal  tenders  by  the  banks  of  New 
York  at  selected  dates  in  1890  and  1891  are  given  below.  I  have 
added  also  the  significant  figures  for  1892,  of  which  more  is  said  in 
the  text  a  few  pages  farther  on.  The  bulk  of  the  "  specie  "  is  gold  ; 
but  it  is  probable  that  some  part  of  the  increased  holdings  of  specie 
at  periods  of  heavy  accumulation  were  in  the  form  of  silver  certifi- 
cates. In  the  legal  tenders,  no  distinction  is  made  in  the  published 
returns  between  the  United  States  notes  of  the  old  issue  and  the  new 
Treasury  notes ;  there  being,  indeed,  no  ground  for  any  distinction 
between  them.     The  figures  indicate  millions  of  dollars. 


Date. 


1890.  Julys 

September  21 
November  29 

1891.  January  3 

April  11 

May  29 

June  20 

July   25 

September  12 
October  12. . . 
November  7. 
December    12 

1892.  January  16. . . 

March    19 

May  21 

June  18 

July    16 

September  17 
November  w 
December  31 

5 


Specie.    Legal  Tenders. 


75-4 

32.6 

76.4 

23.0 

73.2 

22.3 

78.6 

26.6 

76.7 

33-0 

61.0 

43-3 

65.4 

49.2 

68.3 

53- > 

61.7 

48.0 

70.1 

37-7 

81.9 

29.2 

89.8 

32  5 

104.6 

41.6 

99-7 

50.0 

IOI.1 

52.0 

101.0 

57-6 

90.1 

61. 1 

75-7 

52.1 

77.8 

39-8 

76.0 

42.0 

66  THE   ECONOMIC   SITUATION. 

As  it  happened,  a  turn  in  the  balance  of  interna- 
tional payments,  due  chiefly  to  the  complications 
brought  on  in  Europe  by  the  Baring  failure,  led  at 
the  same  time  to  a  heavy  export  of  gold  from  the 
United  States.  The  drain  was  exceptionally  large, 
and  fell  entirely  on  the  Treasury.  Between  Feb- 
ruary and  July,  the  outflow  of  gold  from  the  country 
was  no  less  than  seventy  millions  of  dollars.  Prac- 
tically all  of  this  was  furnished  by  the  sub-Treasury 
in  New  York.  The  Treasury  was  able  to  gain  gold 
in  other  directions,  so  that  its  net  loss  during  this 
period  was  not  more  than  thirty  millions.  But  this 
loss,  with  the  earlier  one  incurred  during  the  fall  of 
1890,  made  a  total  decline  during  the  fiscal  year  of 
seventy  millions,  and  brought  the  gold  reserve  at  the 
close  of  the  fiscal  year,  in  June,  1891,  to  the  figure 
of  one  hundred  and  eighteen  millions. 

It  has  just  been  said  that  the  Treasury,  while  losing 
gold  withdrawn  for  export,  gained  it  from  other 
sources.  The  drain  of  seventy  millions  for  export  in 
the  first  half  of  1891  was  offset  for  the  Treasury  by  a 
gain  of  forty  millions  elsewhere,  reducing  the  net  loss 
in  the  gold  reserve  to  thirty  millions.  This  compen- 
sating gain  was  secured  chiefly  by  the  adoption  of  a 
policy  similar  to  that  which  had  been  resorted  to  in 
1880  in  order  to  further  the  circulation  of  silver  cer- 
tificates. We  have  seen  that  in  1880  a  virtual  pre- 
mium was  offered  to  banks  which  would  deposit  gold 
in  New  York  and  remit  to  the  West,  through  the 
sub-Treasuries,  in  silver  certificates.  In  the  period 
from  1890  to  1892,  the  same  thing  was  done.  The 
Treasury  undertook,  at  an   insignificant  premium,  to 


THE   ACT   OF    189O.  67 

make  transfers  of  money  to  distant  banks  on  deposit 
of  gold  in  New  York  ;  or  to  make  transfers  to  New 
York  on  deposit  of  gold  elsewhere.  During  1891 
and  1892  this  device  was  freely  used,  and  served 
effectively  to  strengthen  the  gold  reserve.  That  ft 
was  wise  to  resort  to  it  under  the  circumstances,  is 
beyond  doubt ;  that  it  was  necessary,  showed  that 
the  time  had  come  for  careful  and  even  anxious  hus- 
banding of  the  Treasury's  stock  of  gold.1 

With  the  fiscal  year,  1891-92,  another  turn  came 
in  the  industrial  and  financial  situation.  The  crops 
of  1891  were  exceptionally  large,  the  wheat  crop 
especially  being  by  far  the  largest  ever  raised.  At 
the  same  time,  the  crops  in  Europe  were  small,  and 
the  demand  for  breadstuffs  for  export  was  great. 
The  situation  promised  to  be  like  that  of  the  golden 
years,   1879  anc^   1880,  when  the   conditions  of  the 

1  The  Treasury  makes  a  charge  of  25  cents  per  $1,000  for  these  trans- 
fers.  On  deposit  of  gold  coin  in  New  York,  the  Treasury  sends  an 
order  by  telegraph  to  the  sub-Treasury  at  the  place  desired,  for  pay- 
ment to  the  correspondent  designated  by  the  New  York  bank.  The 
New  York  bank  is  thus  able  to  make  an  immediate  remittance  at  tri- 
fling expense.  The  Treasury  prepares  for  the  operation  by  sending, 
in  advance,  money  of  the  denominations  likely  to  be  required,  to  the 
sub- Treasuries  in  the  West  and  South.  Where  remittances  to  banks 
not  in  sub-Treasury  cities  are  desired,  cash  is  sent  from  Washington 
on  similar  terms,  in  exchange  for  deposit  of  gold  in  New  York. 

This  arrangement  would  be  convenient  for  the  government  under 
any  circumstances,  apart  from  the  need  of  strengthening  the  gold 
reserve  ;  since  the  payments  by  the  sub-Treasury  in  New  York  are 
normally  much  greater  than  the  government's  collections  for  customs 
and  internal  revenue  at  that  point.  But  since  189O  the  main  object 
of  the  practice  has  been  to  strengthen  the  gold  reserve.  See  the  Re- 
port of  the  Treasurer  for  1889,  p.  12  ;  for  1S91,  pp.  13,  17  ;  for 
1892,  p.  17. 


68  THE   ECONOMIC   SITUATION. 

same  sort  brought  a  sudden  burst  of  prosperity,  a 
large  inflow  of  gold,  and  a  marked  and  permanent 
expansion  of  the  currency  in  actual  use  in  the  com- 
munity. In  part,  the  expected  results  ensued.  Some 
specie  flowed  in  from  abroad,  and  large  sums  of 
money  were  sent  to  the  West.  As  the  legal  tenders 
were  thus  carried  off  from  the  New  York  banks,  the 
Treasury  receipts  of  gold  at  New  York  again  rose.  As 
a  glance  at  the  figures  on  page  58  will  show,  the 
customs  gold  receipts  at  the  close  of  the  year  1891 
were  again  two  thirds  of  the  total.  The  Treasury 
gained  gold  in  its  reserve,  which  at  this  time  went  as 
high  as  one  hundred  and  thirty  millions.  Some  ex- 
pansion took  place  in  all  forms  of  the  currency.  Bank 
loans  and  deposits  increased  ;  and  an  increased  cir- 
culation took  place  of  the  form  of  currency  which  I 
have  called  large  change. 

But  the  revival  of  activity  was  much  less  pro- 
nounced than  it  had  been  in  1880  ;  and  the  effects  on 
the  currency  were  less  striking  than  those  of  the 
earlier  period.  The  exports,  it  is  true,  were  enor- 
mous, and  for  the  fiscal  year  1891-92,  exceeded  the 
imports  by  the  extraordinary  sum  of  two  hundred 
millions  of  dollars.  But  this  heavy  balance  of  pay- 
ments in  favor  of  the  United  States  caused  no  such 
inflow  of  specie  as  that  of  1880.  While  some  gold 
came  in  during  the  last  months  of  1891,  the  great 
sums  due  the  United  States  by  foreign  countries 
seem  to  have  been  paid  chiefly  by  the  transmission 
of  American  securities  held  by  foreign  investors  and 
sent  by  them  for  sale  in  the  United  States.  With 
the  beginning  of  1892  the  effects  of  the  crops  and  ex- 


THE   ACT   OF    189O.  69 

ports  of  1 891  were  no  longer  felt.  The  total  volume 
of  bank  deposits,  as  reported  by  the  Comptroller,  had 
risen  from  a  level  of  about  1,5  50  millions  in  the  spring 
of  1891  to  about  1,750  millions  in  the  spring  of  1892  ; 
then  the  upward  movement  ceased.  While  it  lasted, 
there  was  presumably  a  corresponding  expansion  of 
the  every-day  money  in  use  by  the  community  ;  and 
the  greater  part  of  the  steady  issues  of  new  Treasury 
notes  doubtless  found  a  permanent  circulation  in  this 
growth  of  trade  and  transactions.  But  as  the  year 
1892  advanced,  the  phenomena  of  the  preceding  year 
repeated  themselves.  The  regular  return-flow  of 
currency  to  the  Eastern  cities,  and  especially  to  New 
York,  set  in.  Legal  tenders  accumulated  in  New- 
York  more  markedly  than  in  any  previous  year,  and 
by  mid-summer  the  holdings  of  this  form  of  cash  by 
the  New  York  banks  reached  the  unexampled  figure 
of  over  sixty  millions.1  With  such  a  plethora  of  paper, 
the  Treasury  naturally  received  no  gold  ;  its  gold 
receipts  for  customs  again  melted  away.  A  demand 
for  gold  for  export  set  in,  such  as  is  common  during 
the  spring  months,  and  it  fell,  inevitably,  on  the 
Treasury.  The  reserve  of  gold  was  reduced  to  the 
lowest  point  reached  at  any  time  since  the  resumption 
of  specie  payments, —  one  hundred  and  ten  millions 
at  the  close  of  July,  1892.  As  the  season  advanced, 
and  the  autumnal  flow  of  money  to  the  West  set  in, 
the  banks  began  to  lose  legal  tenders  ;  and  what  was 
more  important  to  the  Treasury,  they  took  advan- 
tage of  the  facilities  offered  by  the  Treasury  for  the 
transfer  of  currency  in  exchange  for  gold  deposits 
1  See  the  figures  given  on  p.  65. 


JO  THE   ECONOMIC    SITUATION. 

in  New  York.  This  device  enabled  the  Treasury  to 
strengthen  its  gold  reserve,  even  though  the  redun- 
dancy of  paper  in  New  York  was  so  great  that  the 
gold  receipts  for  customs  showed  no  gain  in  those 
autumn  months.  It  is  a  striking  fact  that  in  1892, 
for  the  first  time  since  the  resumption  of  specie  pay- 
ments, the  gold  receipts  for  customs  in  New  York 
showed  no  tendency  to  rise  in  the  autumn  months. 
The  Treasury  gold  reserve  rose,  by  the  end  of  1892, 
to  something  over  one  hundred  and  twenty  millions, 
only  because  of  the  premium  offered  in  the  cheap 
and  ready  transfer  of  money  to  the  West  and  South 
in  exchange  for  gold  deposits  in  New  York.1 

The  history  has  been  brought  to  the  close  of  1892. 
The  events  of  the  two  years,  1890-92,  all  point  in  the 
same  direction.  The  decline  in  the  gold  reserve ; 
the  growing  use  of  legal  tenders  in  government  pay- 
ments ;  the  collapse  of  customs  gold  receipts  in  New 
York;  the  accumulation  of  currency  in  that  city  ;  the 
devices  resorted  to  by  the  Treasury  to  draw  gold 
into  its  hands, — all  give  evidence  of  a  redundancy  of 
money,  and  all  seem  to  indicate  that  the  issues  of 
1890  are  greater  than  can  continue  to  be  long  put 

1  In  the  Report  of  the  Treasurer  for  1892,  p.  17,  we  read  that  in  the 
fall  of  1892  "the  gold  reserve,  which  had  suffered  severely,  once 
more  began  to  build  up,  under  careful  management.  Advantage 
wastaken,  to  this  end,  of  the'autumnal  flow  of  currency  to  the  South 
and  West,  by  giving  preference  to  gold  for  deposit  in  exchange  for 
the  paper  desired  for  shipment.  This  plan  worked  well,  and  the 
result  can  be  seen  in  the  improved  condition  of  the  reserve." 

After  these  lines  were  written,  the  month  of  February,  1893, 
brought  a  new  low-water  mark  in  the  gold  reserve,  which  fell  to  one 
hundred  and  three  millions  at  the  close  of  the  month. 


THE   ACT   OF    189O.  /I 

forth  without  causing  a  cessation  of  gold  payments 
by  the  Treasury.  It  would  be  rash  and  idle  to  make 
predictions  for  the  immediate  future  ;  and  indeed 
this  discussion  of  events  too  recent  to  permit  a  com- 
plete view  has  been  introduced  chiefly  by  way  of 
illustrating  the  complicaf:ed  details  of  the  monetary 
situation  and  the  variety  of  conditions  which  affect 
the  working  of  the  act  of  1890. 


VII. 

General  Conclusions. 

If  now  we  review  the  history  of  the  silver  situa- 
tion, we  find  it  leading  to  one  conclusion  much  at 
variance  with  the  usual  expectations  and  predictions. 
The  expansion  of  the  silver  currency  has  followed, 
and  not  preceded,  the  rise  in  prices,  the  speculative 
activity,  and  the  other  phenomena  which  are  associ- 
ated with  an  increase  in  the  supply  of  money.  The 
general  impression  derived  by  the  reader  of  most 
text-books  on  political  economy  is  that  an  increase 
in  the  quantity  of  money  is  the  direct  cause  of  a  rise 
of  prices.  But  the  increase  of  our  silver  currency 
seems  to  have  been  effect  rather  than  cause.  When 
it  was  first  issued,  in  1878,  at  a  time  of  quietude  in 
business  operations,  it  caused  no  expansion  or  infla- 
tion ;  on  the  contrary,  the  Treasury  was  unable  to  get 
the  silver  into  circulation.  When  the  general  revival 
set  in  during  1880-81,  it  went  into  circulation  rapidly 
and  in  large  amounts  ;  but  the  movement  of  silver 
followed,  and  did  not  precede,  the  general  industrial 
change.  When  the  period  of  depression  began  in 
1884,  the  Treasury  went  through  another  period  of 
slow  circulation,  and  the  regular  issue  of  silver  cur- 
rency had  not  the  slightest  effect  in  checking  the 
tendency    to    depression    and     falling    prices.      The 

72 


GENERAL   CONCLUSIONS.  73 

attempt  to  get  out  the  silver  money  simply  led  to 
embarrassment ;  it  flowed  back  to  the  Treasury  in 
tax  receipts.  The  phenomenon  repeated  itself  in 
1890-92.  The  attempt  to  put  forth  more  silver 
money  had  the  same  effect  as  it  had  in  1885  ;  it 
caused  a  back-flow  into  the  Treasury.  For  an  easy 
and  ready  circulation  of  the  new  issues, — if  that  is  to 
come  at  all, — we  must  await  a  revival  of  general 
industrial  activity. 

This  contradiction  between  current  expectations 
and  the  facts  as  they  have  actually  appeared  is 
a  case  of  a  sort  not  uncommon  in  the  economic 
field.  The  growth  of  our  knowledge,  or  at 
least  its  spread,  has  not  kept  pace  with  the 
development  of  the  phenomena  themselves.  Ex- 
planations which  held  good  half  a  century  or  a 
century  ago,  and  were  then  propounded  by  the 
economists,  have  gradually  filtered  into  popular 
knowledge ;  but  by  the  time  they  have  become 
public  property,  the  phenomena  themselves  have  so 
changed  that  a  new  or  modified  explanation  becomes 
necessary.  That  the  general  range  of  prices  depends 
on  the  quantity  of  money,  and  that  an  increase  in 
the  quantity  of  money  will  bring  about  a  general  rise 
in  prices,  has  become  one  of  the  commonplaces  of 
economic  theory.  In  this  simple  form  of  statement, 
"money"  means  what  we  usually  denote  by  that 
term, — coin,  government  notes,  bank-notes.  Five 
hundred  years  ago,  even  a  hundred  years  ago,  when 
almost  all  purchases  were  made  with  actual  coin  or 
notes,  the  proposition  in  all  essentials  was  true.  But 
the   enormous    development    of   credit    in    modern 


74  THE   ECONOMIC   SITUATION. 

times  compels  a  modification  which  has  not  indeed 
failed  to  receive  attention  from  economic  writers, 
yet  has  rarely  been  explained  as  fully,  and  certainly 
has  not  been  kept  in  mind  as  constantly,  as  it  needs 
be.  The  importance  of  the  new  conditions  is  indeed 
dawning  on  the  public  at  large ;  but  their  full  bear- 
ing is  rarely  perceived. 

The  true  way  to  state  the  conditions  on  which,  in 
our  day,  the  general  range  of  prices  depends,  is  to 
compare  the  quantity  of  commodities  offered  for  sale 
with  the  total  volume  of  purchasing  power  in  terms 
of  money.  In  this  volume  of  purchasing  power  the 
largest  item  consists  in  our  day  not  of  actual  money, 
but  of  credit  in  various  forms.  In  countries  like 
England  and  the  United  States  it  consists  chiefly  in 
the  form  of  credit  supplied  by  deposit  banks, — bank 
deposits  and  bank  checks.  That  bank  deposits  and 
checks  are  the  means  of  payment  in  all  large  trans- 
actions, and  in  many  small  ones  ;  that  the  exchanges 
carried  on  through  them  are  greater  than  those  car- 
ried on  with  any  other  form  of  currency  ;  that  they 
are  completed  through  the  machinery  of  clearing- 
houses, with  the  use  of  an  insignificant  amount  of 
coin  or  notes, — these  are  facts  familiar  enough. 
Indeed,  the  effects  of  credit  as  a  substitute  for 
money  have  been  explained  in  economic  text-books 
so  fully  that  they  may  be  assumed  to  be  well  under- 
stood :  it  is  the  extent  rather  than  the  nature  of  the 
effects  that  needs  to  be  insisted  on.'     At  any  one 

1  While  the  general  effects  of  credit  as  a  substitute  for  money  have 
been  much  dilated  on,  the  peculiar  effectiveness  of  bank  deposits  as 
currency,  and  their  preponderating  importance  in   the  machinery  of 


GENERAL   CONCLUSIONS.  75 

time,  and  for  considerable  lengths  of  time,  the  gen- 
eral range  of  prices,  with  a  given  volume  of  trans- 
actions, depends  not  on  the  quantity  of  money  simply, 
but  on  the  volume  of  credit  used  as  purchasing 
power;  and  of  this  volume  of  credit  the  chief  itern_ 
in  countries  like  England  and  the  United  States  is 
bank  currency  in  the  form  of  deposits  and  checks. 

In  such  a  state  of  things  the  increase  of  other 
forms  of  currency  can  have,  in  itself,  only  a  minor 
effect.  Indeed,  more  than  this;  so  long  as  the  vol- 
ume of  credit,  and  especially  that  of  the  bank  cur- 
rency  of  checks  and  deposits,  is  not  affected,  there 
is  a  strict  limit  to  the  quantity  of  any  other  form  of 
currency  which  will  in  fact  be  used.  It  is  obvious, 
for  instance,  that  the  quantity  of  dimes  and  quarter 
dollars  which  will  keep  in  circulation  in  any  com- 
munity, at  a  given  range  of  prices,  is  a  definite  and 
determined  amount.  People  need  a  certain  number 
of  small  coins  for  the  convenience  of  making  change. 
If  more  are  issued  than  are  needed  for  such  pur- 
poses, the  coins  will  not  remain  in  circulation.  They 
will  accumulate  in  the  tills  of  shop-keepers,  street- 
car companies,  and  other  receivers  of  small  pay- 
ments, and  then  make  their  way  into  the  hands  of 
the  banks  ;  finally,  the  excess  will  work  its  way  into 
the  government  Treasury.     Under  our  very  sensible 

exchange  in  England  and  the  United  States,  have  received  compara- 
tively little  attention.  For  a  systematic  exposition,  see  Professor  C. 
F.  Dunbar's  Chapters  on  the  Theory  and  History  of  Banking;  and  for 
an  examination  of  the  part  played  by  bank  deposits  as  currency  in  the 
United  States,  see  a  paper  by  the  same  writer  in  the  Quarterly 
Journal  of  Economics,  vol.  i.,  p.  401,  July,  1887. 


j6  THE    ECONOMIC    SITUATION. 

legislation  on  subsidiary  coins,  the  government  not 
only  issues  such  pieces  in  any  quantity  desired,  but 
redeems  them  in  any  quantity.  The  amount  out- 
standing is  allowed  to  regulate  itself,  and,  so  far 
from  being  a  factor  in  determining  the  general  range 
of  prices,  is  itself  determined  by  the  general  range  of 
prices.  At  a  higher  range  of  prices  more  of  them 
will  be  called  for,  and  the  larger  denominations  may 
form  a  greater  proportion  of  the  whole ;  at  a  lower 
range  of  prices  less  will  be  called  for,  and  in  smaller 
denominations. 

What  is  true  of  the  subsidiary  coins  is  equally 
true,  in  all  essentials,  of  the  dollar  pieces,  the  five 
dollars,  the  ten  dollars.  The  dimes  and  quarters  and 
half  dollars  are  the  small  change  of  the  people ;  the 
dollars  and  five  dollars  and  ten  dollars  are  the  large 
change.  They,  too,  in  a  country  where  credit  has 
reached  as  high  a  state  of  development  as  in  the 
United  States,  are  a  sort  of  subsidiary  money. 
Credit,  chiefly  in  the  form  of  bank  deposits,  is  the 
main  factor  in  affecting  the  ups  and  downs  of  prices; 
and  the  expansion  or  contraction  of  credit  depends 
on  conditions  among  which  the  quantity  of  money 
(in  the  ordinary  sense)  plays  at  any  given  time  no 
important  part.  The  quantity  of  money  which  may 
affect  its  fluctuations  is  not,  in  any  case,  the  general 
supply  in  the  community,  but  the  supply  held  as 
reserve  against  deposits  in  the  vaults  of  banks. 
Even  as  to  this,  the  connection  with  the  variations 
in  purchasing  power  used  by  the  community  in  the 
form  of  bank  deposits  and  checks  is  only  a  loose 
and  indirect  one. 


GENERAL   CONCLUSIONS.  JJ 

At  all  events,  the  silver  money  of  recent  years  has 
not  had  any  direct  effect  in  stimulating  the  growth 
of  this  bank  currency,  the  largest  and  most  important 
part  of  the  circulating  medium.  The  attitude  of 
the  banks  toward  the  silver  currency  of  1878-90 
prevented  it  from  accumulating  on  their  hands,  or 
forming  any  part  of  their  effective  reserves.  The 
contraction  or  expansion  of  the  currency  of  bank 
deposits  and  checks  therefore  was  not  directly 
affected  by  it.  The  silver  issues  supplied,  in  great 
part,  what  I  have  called  the  large  change  of  the 
community;  but  the  total  volume  of  the  currency, 
and  the  general  range  of  prices,  were  not  directly 
affected   by  them. 

This  is  the  key  to  the  history  of  the  silver  cur- 
rency under  the  act  of  1878.  It  did  not  cause  any 
expansion  in  prices.  The  volume  used  by  the  public 
was  effect  and  not  cause.  In  times  of  activity,  more 
of  large  change  was  called  for  ;  in  times  of  depression, 
less  ;  but  the  large  change,  for  which  the  silver  issues 
have  been  used,  were  not  the  cause  of  either  rising 
or  falling  prices.  On  the  whole  and  in  the  long  run, 
and  barring  periods  of  difficulty  such  as  the  years 
1884-85.  the  quantity  issued  under  the  act  of  1878 
was  not  greater  than  was  readily  used  in  the  retail 
transactions  of  a  community  growing  as  rapidly  in 
wealth  and  population  as  the  United  States.  The 
contraction  of  the  national  bank-notes  aided  in  mak- 
ing a  ready  place  for  them  in  such  uses.  The  silver 
currency  under  the  act  of  1 878  simply  supplied  the 
community  with  the  increasing  amount  of  money 
needed  for  its  every-day  retail  transactions. 


78  THE   ECONOMIC    SITUATION. 

It  may  indeed  be  said  that  in  the  absence  of  the 
silver  there  would  have  been  severe  contraction. 
Prices,  in  fact,  have  probably  fallen  somewhat,  not- 
withstanding the  silver  issues, — a  phenomenon  of 
which  the  meaning  will  be  discussed  in  the  second 
part  of  this  paper  ;  and  it  may  be  said  that  the  fall 
would  have  been  even  greater,  and  its  effects  more 
serious,  if  there  had  been  no  silver.  But  in  that  case 
it  cannot  be  doubted  that  some  other  form  of  large 
change  would  have  come  into  use.  It  is  idle  to  say 
what  sort  of  currency  would  have  taken  the  place 
now  occupied  by  silver:  whether  Congress  might 
have  rescued  the  national  bank  circulation  from  slow 
extinction,  whether  other  forms  of  credit  money 
would  have  been  issued  by  the  government  itself, 
whether  still  larger  amounts  of  gold  would  have 
flowed  in  from  abroad.  The  only  thing  certain  is 
that  in  a  country  like  the  United  States  no  real 
inconvenience  or  suffering  from  a  scarcity  of  this 
sort  of  money  would  have  been  permitted.  The 
fact  has  been  that  the  silver  currency  supplied  the 
need,  for  good  or  evil,  supplanting  the  bank-notes, 
and  supplementing  the  greenbacks. 


VIII. 

The  Probable  Future. — Free  Coinage. 

So  much  for  the  explanation  of  the  past,  and 
especially  of  the  effects  of  the  act  of  1878.  We  may 
turn  to  some  consideration  of  the  probabilities  of 
the  future  and  of  the  working  of  the  act  of  1890. 
That  consideration  must  be  brief,  and  must  be 
rather  a  forecast  of  possibilities  than  a  prophecy  of 
events  to  come.  The  act  of  1890  practically  doubled 
the  issue  of  silver  currency.  What  will  be  the 
outcome  ? ' 

In  considering  this  question,  some  allowance  must 
be  made  for  the  change  in  the  policy  of  banks  in 
regard  to  the  new  notes,  which  may  lead  to  a  wider 
use  of  them  in  bank  reserves  and  in  clearing-house 
settlements.     We  have  seen  that  the  banks  of  New 

1  There  were  some  minor  sources  of  addition  to  the  silver  currency, 
which  may  be  briefly  referred  to  here  :  (i)  In  a  rider  to  an  appropria- 
tion act  passed  at  the  session  of  1890-91,  Congress  directed  that  the 
trade  dollars  redeemed  under  the  earlier  act  of  1 888,  should  be  coined 
into  standard  silver  dollars.  The  bullion  in  the  trade  dollars 
amounted  to  some  five  millions,  against  which,  when  coined,  silver 
certificates  could  be  issued.  (2)  There  was  a  profit,  or  seniorage,  on 
the  silver  dollars  which  were  coined  under  the  act  of  1890,  between 
its  passage  and  the  cessation  of  coinage  en  July  1,  1891.  Against 
this  profit,  amounting  to  four  and  one  half  millions,  the  Attorney- 
General  concluded  that  the  Treasury  could  also  issue  silver 
certificates. 


80  THE    ECONOMIC   SITUATION. 

York  have  not  only  accepted  the  Treasury  notes  of 
1890  in  payments  from  the  Treasury,  but  have  used 
them  in  settlement  of  clearing-house  balances  among 
themselves.  A  general  use  of  the  new  notes  for 
bank  reserves  and  payments  obviously  would  open 
a  new  place  for  their  absorption,  and  would  aid  in 
preventing  them  from  becoming  redundant.  The 
cash  holdings  of  the  banks  increase  year  by  year 
with  their  increasing  deposits  and  business ;  not 
indeed  in  the  same  ratio  as  the  increase  of  their 
business,  yet  in  some  proportion  to  it.  If  the  new 
notes  should  be  freely  held  by  the  banks,  their 
absorption  into  use  would  be  easier  than  that  of  the 
silver  certificates  was  ;  and,  moreover,  their  effects  on 
trade  and  industry  might  be  different.  We  have 
seen  that  they  play  already  no  inconsiderable  part 
in  clearing-house  transactions  ;  although  it  is  clear 
that  on  the  other  hand  they  show  a  tendency  to  flow 
back  in  the  government's  hands,  indicating  that  they 
are  not  welcomed  in  bank  holdings.  The  cash  held 
by  the  national  banks  increases,  one  year  with 
another,  at  the  rate  of  ten  or  twelve  millions  a  year. 
Here  there  is  a  possibility  for  a  use  or  absorption  of 
the  new  issues  which  may  prevent  their  circulation 
from  being  restricted  within  the  comparatively  nar- 
row field  of  the  old  silver  certificates. 

This  is  not  the  only  element  of  uncertainty  among 
the  factors  on  which  the  working  of  the  act  of  1890 
depends.  No  one  can  foresee  what  will  be  the 
growth  of  the  population  and  trade  of  the  country  ; 
what  will  be  the  nature  or  amount  of  the  currency 
which,  under  the  gold  standard,  will  be  called  for  to 


THE   PROBABLE   FUTURE.  8l 

meet  the  convenience  of  the  public  ;  what  will  be  the 
alternations  of  business  activity,  what  the  fluctua- 
tions of  international  trade.  The  very  volume  in 
which  the  Treasury  notes  are  issued  is  uncertain, 
depending  as  it  does  on  the  price  of  silver.  A  further 
marked  fall  in  the  price  of  silver  would  reduce  the 
quantity  of  the  issues,  while  a  rapid  growth  of  the 
community  would  enlarge  its  use  of  currency  of  every 
sort.  It  is  not  impossible  that  two  movements  of 
this  sort  might  unite  to  make  the  issues  of  1890 
comparatively  harmless.  Fortune  has  favored  this 
country  more  than  once  in  its  venturesome  financial 
experiments,  and  may  again  prove  the  fears  of  the 
sober  and  conservative  to  have  been  groundless. 

Nevertheless,  the  indications  are  that  the  Treasury 
notes  of  1890  will  be  excessive  in  a  sense  in  which 
the  silver  currency  of  1878  was  not.  At  the  rate  of 
fifty  millions  a  year,  they  probably  bring  more  new 
currency  into  the  circulating  medium  than  can  be 
easily  absorbed  even  by  a  community  like  the 
United  States.  Unless  Congress  wipes  out  entirely 
the  national  bank-notes,  or  a  remarkable  change 
takes  place  in  the  habits  of  the  community,  the 
notes  will  not  be  able  to  circulate  in  the  channels  in 
which  the  old  silver  certificates  and  dollars  found 
their  easy  place ;  and  such  additional  play  as  they 
may  have  will  hardly  suffice  to  prevent  their  becom- 
ing redundant.  Certainly  some  significant  signs  of 
redundancy  showed  themselves  in  1891-92.  Predic- 
tion in  matters  of  this  sort  is  always  hazardous,  and 
it  is  not  possible  to  say  unhesitatingly  that  we  are 
doing  more  than  sailing  very  close  to  the  wind.    But 

6 


82  THE   ECONOMIC   SITUATION. 

it  may  be  instructive  to  consider  what  will  be  the 
final  effects  of  excessive  issues — if  such  they  prove 
to  be,  and  when  and  how  they  will  operate  to  drive 
out  gold  and  cause  a  change  in  the  general  level  of 
prices. 

Whether  or  no  the  ultimate  consequences  are 
clear,  the  precise  mode  in  which  they  will  be  brought 
about  certainly  is  not  clear.  That  the  immediate 
occasion  and  the  immediate  effects  of  a  suspension 
of  gold  payments  by  the  Treasury  are  not  easy  to 
forecast,  is  evident  from  the  striking  inconsistency 
in  the  predictions  made  by  those  who  agree  in 
thinking  the  result  a  catastrophe.  On  the  one  hand, 
we  are  told  that  the  effects  will  be  similar  to  those 
of  the  issue  of  inconvertible  paper :  inflation,  specu- 
lation, feverish  activity,  eventual  collapse.  On  the 
other  hand,  we  are  told  to  expect  contraction.  Gold, 
it  is  said,  will  disappear  from  circulation,  and  a  sharp 
fall  in  prices  will  ensue.  The  uncertainty  as  to  the 
probable  immediate  effects  of  the  change  from  a  gold 
to  a  silver  standard,  of  which  these  different  predic- 
tions give  evidence,  is  the  result  largely  of  the 
same  fundamental  misconception  of  money  and 
monetary  phenomena  to  which  I  have  already  re- 
ferred,— the  failure  to  recognize  the  vital  part  played 
by  bank  currency  in  the  form  of  deposits  and  checks.. 
Any  attempt  to  reach  conclusions  as  to  the  effects 
of  the  new  notes,  which  neglects  this  part  of  the 
medium  of  exchange,  must  be  futile.  But  the  opera- 
tion of  this  medium  is  of  a  peculiarly  unpredictable 
sort.  Its  expansion  or  contraction  depends,  to  re- 
peat once  more,  not  on  the  quantity  of  "money" 


THE   PROBABLE    FUTURE.  83 

in  the  ordinary  sense,  but  mainly  in  the  temper  and 
the  expectations  of  the  banks  and  of  the  business 
public.  These  are  things  impossible  of  prediction. 
The  best  that  can  be  done  is  to  point  out  how- 
matters  will  work  under  one  or  two  probable  sets  of 
circumstances ;  and  this  form  of  prediction  I  will 
venture  on. 

In  the  first  place,  we  may  suppose  the  time  when 
notes  reach  the  stage  of  issue  in  excess  of  the  demand 
for  large  change  to  be  one  of  the  ordinary  periods 
of  depression  and  business  inactivity,  such,  for  ex- 
ample, as  has  prevailed  during  the  greater  part  of 
.1891.  At  such  times  the  banks  have  plenty  of  cash 
in  their  vaults  ;  they  find  it  difficult  to  induce  busi- 
ness men  to  increase  their  credits  and  deposits ;  the 
industrial  current  is  sluggish,  and  it  is  not  easily 
moved  by  a  fresh  inflow.  The  notes  which  the  gov- 
ernment would  pay  out  to  bullion-sellers,  or  to  other 
creditors,  would  accumulate  in  bank  vaults,  and 
thence  more  and  more  of  them  would  flow  back  into 
the  Treasury.  A  larger  and  larger  proportion  of  the 
government's  revenue  would  be  received  in  these 
notes,  or  in  some  sort  of  money  other  than  gold. 
Meanwhile,  gold  would  be  paid  out  to  such  as  called 
for  it.  If  the  period  happened  to  be  one  of  an  un- 
favorable balance  of  trade,  and  if  there  were  a  need 
of  shipments  of  money  abroad,  the  drain  would  fall 
entirely  on  the  government.  By  a  process  of  this 
sort,  the  Treasury  might  be  drained  of  its  gold,  and 
brought  to  a  suspension,  while  yet  no  effects  in  the 
direction  of  inflation  or  of  rising  prices  had  showed 
themselves. 


84  THE    ECONOMIC    SITUATION. 

Assume  now  conditions  of  a  different  sort :  good 
times  and  active  business,  hopefulness  on  every  side, 
large  new  investments  of  capital,  a  burst  of  specula- 
tive activity.  An  additional  amount  of  large  change 
will  then  find  its  way  into  use  with  greater  ease.  At 
the  same  time,  accommodation  from  the  banks  is  in 
demand,  their  loans  and  deposits  increase,  their  re- 
serves are  small  in  proportion  to  deposits.  These 
are  the  conditions  under  which  a  free  use  of  the  new 
notes  by  the  banks  would  be  most  likely  to  have 
important  effects.  If  the  new  issues,  so  far  as  not 
absorbed  by  the  public,  were  readily  used  by  the 
banks  for  reserve,  they  would  aid  in  enabling  bank 
loans  and  deposits  to  mount  higher  and  higher. 
Then  both  forms  of  the  currency  would  expand  : 
the  money  of  every-day  use,  as  well  as  the  bank  cur- 
rency of  large  transactions.  All  the  phenomena 
which  precede  a  commercial  crisis  might  be  looked 
for, — active  speculation,  more  or  less  of  rash  in- 
vestment, over-trading,  rapidly  rising  imports.  The 
rise  in  imports  would  necessitate  sooner  or  later  an 
outflow  of  gold  ;  while  the  speculative  activity  would 
culminate  in  the  crisis.  The  drain  of  gold,  which 
might  come  before  the  crisis  and  so  aid  to  precipi- 
tate it,  or  might  come  after  it  in  the  subsequent 
period  of  dulness,  must  fall  on  the  Treasury.  In 
this  case,  the  phenomena  of  inflation  and  rising  prices 
precede  the  conditions  under  which  a  suspension  of 
gold  payments  by  the  Treasury  becomes  possible  or 
probable. 

If  the  stage  of  suspension  of  gold  payments  were 
reached,  the    immediate    results    in    all    probability 


THE   PROBABLE   FUTURE.  85 

would  not  be  of  a  disastrous  sort.  Gold  would 
doubtless  command  at  once  a  premium  over  other 
forms  of  money.  The  extent  of  that  premium  would 
depend  partly  on  the  urgency  of  the  needs  of  bank- 
ers, importers,  and  others  having  gold  payments  to 
make  abroad  or  at  home  ;  but  it  would  be  in  large 
part  a  matter  of  speculation  as  to  the  future  policy 
and  the  financial  prospects  of  the  Treasury.  Gold 
would  not  disappear  from  circulation,  for  the  simple 
reason  that  there  is  none  of  it  in  circulation  to  dis- 
appear. It  would  carry  us  too  far  from  our  subject  to 
examine  the  extent  and  location  of  the  gold  supply 
in  this  country.  The  Treasury  officers  publish  regu- 
larly certain  statements  as  to  the  amount  of  gold  in 
the  country,  of  which  I  can  here  say  only  that  they 
rest  on  an  uncertain  basis,  and  in  my  opinion  exag- 
gerate our  holdings  of  that  metal.  At  all  events,  the 
only  amounts  of  substantial  importance  for  the  cur- 
rency situation  are  those  held  by  the  banks  and  by 
the  Treasury.1     The  amount  held  by  the  Treasury, 

1  For  July  1,  1892,  the  monetary  stock  of  gold  in  the  United  States 

was  officially  stated  thus  : 

In  the  Treasury 255-6  millions. 

In  national  banks 96.7        " 

In  other  banks  and  in  individual  hands. .   311. 9        " 

Total 664.2 

The  stock  here  credited  to  the  Treasury  is  that  physically  in  its 
possession.  Of  this  stock,  the  Treasury  owned,  deducting  gold  cer- 
tificates outstanding,  1 14. 3  millions  ;  while  the  national  banks  owned, 
adding  gold  certificates  held  by  them,  191. 2  millions. 

It  will  be  seen  that  over  three  hundred  millions  are  stated  to  be  in 
"other  banks"  (state  and  private  banks)  and  in  individual  hands.  There 
are  no  means  of  ascertaining  w  ith  accuracy  how  much  gold  these  "  other 
banks  "  held  ;  but  if  gold  bore  the  same  proportion  to  their  total  cash, 


86  THE   ECONOMIC   SITUATION. 

after  the  suspension  of  gold  payments,  would  be 
simply  a  hoard.  That  of  the  banks  would  continue 
to  perform,  after  the  break-down  as  before,  the  func- 
tion of  a  reserve  for  deposits.  No  depositor  or 
creditor  could  get  hold  of  it ;  if  he  insisted  on  pay- 
ment from  his  bank,  in  expectation  of  getting  gold, 
he  would  receive  only  "current  funds,"  which  would 
be  at  a  discount  compared  with  gold.  If  the  premium 
on  gold  lasted  for  some  time,  if  the  Treasury  failed 
to  resume,  or  if  Congress  took  no  steps  toward  a 
return  to  gold  payments,  the  banks  doubtless  would 
dispose  of  their  gold  from  time  to  time  at  a  premium, 
and  reap  the  profit  of  the  operation.  This  was  their 
good  fortune  during  the  Civil  War,  when,  at  one 
time  or  another  between  1862  and  1865,  they  dis- 
posed of  their  gold  at  a  high  rate  in  exchange  for 
the  depreciated  greenbacks. 

as  the  gold  held  by  national  banks  bore  to  the  total  cash  held  by  these, 
they  would  have  had  in  the  neighborhood  of  fifty  millions  of  gold 
coin.  (See  the  figures  given  by  the  Comptroller  of  the  Currency  in 
the  Report  for  1892,  p.  86.)  This  would  leave  probably  two  hundred 
and  fifty  millions  of  gold — certainly  a  good  deal  over  two  hundred 
millions — "in  individual  hands,"  that  is,  in  every-day  circulation. 
As  the  total  bank-note  circulation  at  the  same  date  was  one  hundred 
and  eighty-six  millions,  of  which  over  twenty  millions  was  in  bank 
vaults,  we  should  expect  gold  coin  to  be  at  least  as  plentiful  in  every- 
day circulation  as  bank-notes.  But  certainly  it  is  not  so  common. 
Except  on  the  Pacific  cost,  it  is  very  rarely  seen.  Some  sums  may  be 
in  hoards  ;  yet  any  considerable  amount  of  hoarding  in  a  community 
like  the  United  States  is  exceedingly  improbable.  It  is  much  more 
probable  that  there  is  a  mistake  in  the  official  estimates.  These  rest 
on  intricate  calculations  as  to  the  imports,  exports,  domestic  produc- 
tion, consumption  in  the  arts,  and  other  factors,  some  of  which  bring 
large  possibilities  of  error.  On  the  whole,  I  have  little  doubt  that 
the  Treasury  estimate  is  greatly  in  excess  of  the  actual  stock. 


THE    PROBABLE   FUTURE.  87 

The  question  is  now  easily  disposed  of  whether 
there  might  be  a  contraction  of  the  currency  in  con- 
sequence of  the  suspension  of  gold  payments.  It  has 
just  been  said  that  there  would  be  none  from  the 
disappearance  of  gold.  But  there  might  be  a  con- 
traction of  credit  which  would  have  the  same  effect, 
— indeed,  a  greater  effect  than  a  diminution  in  the 
quantity  of  coin  or  of  paper  money.  The  final  step 
of  suspension  of  gold  payments  by  the  Treasury  might 
cause,  more  or  less  reasonably,  an  uneasiness  among 
the  mercantile  public,  the  banks,  the  foreign  and 
domestic  holders  of  securities,  which  would  lead  to  a 
sharp  contraction  of  credit,  and  especially  of  bank 
credits  and  deposits.  Such  a  change  would  mean  a 
real,  perhaps  a  serious,  contraction  of  the  circulating 
medium,  and  a  real  fall  in  prices. 

Certain  other  factors  may  be  noted,  affecting  the 
permanent  and  the  temporary  situation  of  the  Treas- 
ury under  such  contingencies  as  have  just  been 
described.  At  any  given  time,  the  financial  condition 
of  the  Treasury  will  be  of  importance.  A  large  sur- 
plus, or  a  large  excess  of  revenue  over  payments,  will 
enable  it  to  hold  its  own  and  maintain  gold  payments 
without  serious  difficulty  under  conditions  which 
would  lead  to  a  break-down  if  the  cash  holdings  were 
small  and  the  expenditure  exceeded  the  revenue. 
In  1884-85  and  in  1890-91  the  outcome  would  have 
been  at  least  uncertain,  if  the  Treasury  at  both 
times  had  not  begun  with  a  large  accumulation  of 
gold.  Further,  it  is  conceivable  that  a  drain  setting 
in  at  a  time  when  the  Treasury  gold  is  low,  may 
be    met,    and    embarrassment    for    the    time    being 


88  THE   ECONOMIC   SITUATION. 

warded  off,  by  a  process  of  borrowing  gold,  or  of 
selling  bonds  for  gold.  It  has  been  suggested  that 
the  resumption  act  of  1875  authorizes  the  Secretary 
of  the  Treasury  to  sell  bonds  at  his  discretion  for 
the  purpose  of  redeeming  United  States  notes  of 
the  old  issue,  and  that  this  power  might  be  exercised 
to  enable  the  Treasury,  if  in  straits,  to  secure  an 
additional  stock  of  gold.  It  is  by  no  means  clear 
that  such  a  power  is  conferred  by  the  resumption 
act.  Yet  the  present  Secretary  of  the  Treasury 
has  publicly  intimated  his  intention  to  resort  to 
this  power  in  case  of  need  ;  and  some  such  expedi- 
ent might  serve  to  tide  over  a  period  of  temporary 
embarrassment,  or  ward  off  for  a  time  the  results 
which  may  be  expected  from  permanent  sources 
of  danger.1 

A  permanent  break-down  of  gold  payments  by  the 
Treasury,  and  a  permanent  adjustment  to  a  silver 
basis,  can  come  only  from  a  foreign  drain  of  gold.  It 
is  true  that  a  suspension  is  possible  without  it.  A 
heavy  deficit  in  the  finances  might  lead  to  it  ;  or  an 
inpouring  of  notes  and  silver,  instead  of  gold,  in  the 
tax   receipts.     From    embarrassments   due   to   these 

'In  a  public  address  at  the  dinner  of  the  New  York  Chamber  of 
Commerce,  on  November  17,  1 891,  Secretary  Foster  stated  his  opinion 
that  the  resumption  act  gave  authority  for  the  issue  of  bonds  U 
replace  or  increase  the  reserve  fund  of  one  hundred  millions,  and  in- 
timated that  he  would  make  use  of  the  authority  in  case  of  need. 
The  language  of  the  resumption  act  is  that,  "  to  enable  the  Secretary 
of  the  Treasury  to  prepare  and  provide  for  the  redemption  "  of  the 
notes,  he  is  authorized  to  sell  bonds  "  to  the  extent  necessary  tocarry 
this  act  into  full  effect."  It  may  be  a  question  whether  the  language 
confers  authority  to  sell  bonds  for  an  indefinite  period  after  resump- 
tion has  once  been  accomplished. 


THE   PROBABLE    FUTURE.  89 

causes,  however,  uncomplicated  by  a  foreign  drain, 
the  Treasury  may  recover  with  comparative  ease. 
But  if  the  gold  does  not  stay  in  the  country,  and 
flows  abroad,  the  loss  and  the  danger  are  permanent. 
A  foreign  drain  may  come  at  any  time,  and  from 
various  causes :  from  higher  prices  leading  to  heavier 
imports,  from  short  crops,  from  heavy  sales  in  this 
country  of  securities  held  by  foreign  investors,  from 
any  cause  leading  to  a  large  demand  for  ready  cash 
in  the  commercial  centres  of  Europe.  Any  gold  that 
flows  abroad  is  not  likely  to  return.  It  would  be 
rash  to  say  that  the  return  of  part  of  it  is  impossible 
or  improbable  ;  but  our  issues  of  Treasury  notes  are 
filling  up  the  channels  of  circulation  so  rapidly  that 
its  return  is  improbable.  Exceptional  conditions  of 
international  trade  may  indeed  reverse  the  normal 
state  of  things,  and  cause  a  large  quantity  of  gold 
again  to  flow  to  the  United  States.  The  possibilities 
in  this  direction  have  already  been  referred  to,  and 
serve  to  emphasize  what  has  been  said  more  than 
once  in  this  paper  as  to  the  hazard  of  specific  pre- 
diction in  regard  to  the  results  of  any  monetary 
experiment. 

The  doubts  which  have  been  expressed  in  the  pre- 
ceding paragraphs  as  to  the  mode  in  which  the  issues 
of  more  silver  money  will  work,  and  the  corrections 
which  have  been  suggested  as  to  current  predictions 
and  expectations,  may  leave  the  reader  uncertain 
whether  there  is  anything  clear  and  specific  to  be 
said  as  the  effects  of  the  silver  legislation.  But  it  is 
only  as  to  the  promptness  of  the  effects,  and  the 
mode  in  which  they  will  be  brought  about,  that  there 


go  THE   ECONOMIC   SITUATION. 

need  be  any  real  doubt.  Eventually,  it  remains  true 
that  an  increase  in  the  quantity  of  money  leads  to 
higher  prices.  In  any  community  whose  habits  and 
ways  in  the  use  of  credit  are  constant,  the  super- 
structure of  credit  will  be,  in  the  long  run,  propor- 
tional to  the  amount  of  money  permanently  out- 
standing.  A  permanent  increase  in  the  cash  forming 
the  basis  of  the  machinery  of  exchange  will  be  fol- 
lowed by  an  expansion  of  credit,  both  in  the  form 
of  bank  credit  and  in  other  forms,  and  by  a  rise  in 
prices.  The  correspondence  between  the  increase  in 
the  quantity  of  money  and  the  rise  in  prices  will 
show  itself  only  in  the  course  of  time,  and  will  prob- 
ably never  be  exact  ;  but  in  the  long  run  there  will 
be  some  rough  sort  of  correspondence. 

The  extent  of  the  rise  in  prices,  however,  is  another 
subject  on  which  it  is  hazardous  to  make  any  attempt 
at  precision  of  statement.  The  premium  on  gold  is 
usually  assumed  to  measure  the  depreciation  of  in- 
convertible paper  or  of  a  silver  currency.  But  the 
real  depreciation,  and  the  serious  effect,  of  the  issue 
of  more  money,  is  in  the  general  rise  of  prices ;  and 
of  this  the  gold  premium  is  by  no  means  an  accurate 
gauge.  We  have  seen,  in  the  preceding  pages,  that 
the  gold  premium  may  set  in  during  a  period  of 
depression,  of  restricted  credit,  of  falling  prices ; 
while,  on  the  other  hand,  a  rise  in  prices,  partly  the 
effect  of  new  issues  of  silver  notes,  may  exist  for  a 
time  without  the  accompaniment  of  a  gold  premium. 
Eventually,  no  doubt,  the  steady  excessive  issue  of 
silver  notes  would  bring  about  both  the  gold  pre- 
mium and  the  higher  prices.     No  doubt,  too,  if  the 


THE    PROBABLE   FUTURE.  91 

suspension  of  gold  payments  proved  permanent,  the 
gold  premium  in  time  would  correspond  roughly  to 
the  difference  between  the  intrinsic  values  of  the 
gold  and  silver  dollars,  as  measured  by  their  power 
of  purchasing  commodities.  General  prices  and 
money  incomes,  in  other  words,  would  rise  in  about 
the  same  proportion  as  the  gold  premium.  But  the 
rise  would  be  different  with  different  articles,  and 
would  take  place  more  slowly  with  some  than  with 
others.  It  would  never  show  that  uniform  adjust- 
ment to  a  higher  level  which  we  are  sometimes  to 
expect.  Money  incomes,  wages,  rents,  as  well  as  the 
prices  of  commodities,  would  gradually  rise,  some 
more,  some  less,  by  an  irregular  and  perhaps  spas- 
modic process.  Wages  of  manual  laborers  probably 
would  advance  late  ;  though  this  again  would  depend 
on  the  state  of  the  demand  for  laborers,  and  on  the 
effectiveness  of  the  labor  organizations.  It  would 
carry  us  too  far  to  enter  into  a  discussion  of  the 
process  by  which  a  general  rise  or  fall  in  prices  and 
money  incomes  is  brought  about.  Briefly,  it  may 
be  said  that  so  far  as  commodities  which  are  the 
subject  of  international  trade  are  concerned,  the 
changes  in  prices  would  accommodate  themselves 
with  comparative  rapidity  and  exactness  to  the  gold 
premium.  Exports  and  imports  would  be  on  the 
silver  basis  more  quickly  ;  other  commodities  and 
general  money  incomes,  much  less  quickly  and 
exactly.     In  the  end,  the  rise  would  be  general. 

One  subject  more  may  be  touched  on,  before  con- 
cluding the  first  part  of  this  paper  ;  namely,  the  prob- 
able working  of  an  act  for  the  free  coinage  of  silver 


92  THE    ECONOMIC   SITUATION. 

at  the  present  ratio.  The  consequences  of  such  a 
measure  would  differ  in  degree  rather  than  in  kind 
from  those  likely  to  ensue  from  the  present  legisla- 
tion. The  break-down  of  the  gold  standard  would 
come  sooner ;  the  effect  on  general  prices  would  also 
ensue,  though  less  promptly  and  less  certainly. 

If  a  measure  for  free  coinage  should  pass,  it  would 
probably  contain  provisions  similar  to  those  of  the 
act  of  1890,  for  the  issue  of  paper  representations  of 
silver.  Legal-tender  notes  of  any  desired  denomina- 
tion would  be  given  in  exchange  for  deposits  of 
silver  from  any  quarter  and  in  any  amount,  at  the 
rate  of  one  dollar  for  each  37 1|  grains  of  pure  silver, 
or  412^- grains  of  standard  silver.  The  result  must 
be  the  issue  of  more  currency  than  is  now  put  forth, 
and  a  hastening  of  the  effects.  No  doubt  we  cannot 
be  sure  that  the  flow  of  silver  to  the  United  States 
mint  would  be  as  prompt  and  as  enormous  as  is 
sometimes  predicted.  It  is  impossible  to  say  how- 
great  and  how  rapid  the  presentation  of  silver  would 
be.  For  one  month  or  for  six  months,  perhaps  even 
longer,  the  amount  presented  might  conceivably  not 
be  such  as  to  swamp  the  Treasury;  and  for  a  while 
the  predictions  of  the  free  silver  advocates  as  to  the 
concurrent  circulation  of  silver  and  gold  might  be 
fulfilled.1     I  do  not  indeed  believe  that  such  a  tern- 

1  The  reader  will  find  an  able  and  ingenious  argument  to  show  that 
free  coinage  would  not  drive  out  gold,  in  the  report  of  the  minority 
of  the  Committee  on  Coinage  on  the  silver  bill  of  1890-91  ;  printed 
in  Reports  of  Committees,  51st  Congr.,  2d  session,  Report  No.  3967, 
PP-  I5-3°-  Eor  a  sober  statement  of  the  probabilities  the  other  way, 
see  the  testimony  of  Mr.  Leech,  the  Director  of  the  Mint,  in  the 
Hearings  appended  to  the  same  report,  pp.  32-36. 


THE   PROBABLE   FUTURE.  93 

porary  success  would  be  attained  ;  for  the  passage 
of  the  measure  might  be  expected  to  ruin  confidence 
in  the  Treasury's  ability  to  maintain  gold  payments, 
and  lead  to  the  presentation  for  payment  in  gold 
of  greenbacks  and  Treasury  notes  now  outstanding. 
But  even  if  this  direct  cause  did  not  bring  about  the 
break-down  of  gold  payments,  the  indirect  one  of 
cessation  of  gold  receipts  by  the  Treasury  would 
speedily  bring  it  about.  The  United  States  would 
be  the  tempting  market  for  the  disposal  of  all  the 
silver  in  the  world  available  for  transmission  to  this 
country;  and  the  inflow  of  silver  could  not  fail  in  a 
very  short  time,  by  one  process  or  another,  to  destroy 
the  Treasury  gold  reserve,  and  so  put  an  end  to  the 
gold  standard. 

But  while  the  break-down  of  the  gold  standard 
and  the  appearance  of  a  gold  premium  would  be  the 
early,  if  not  the  immediate,  results  of  free  coinage  of 
silver,  the  effects  on  general  prices  would  be  much 
less  prompt.  It  is  not  necessary  to  repeat  the 
grounds  for  this  statement.  The  part  which  the 
silver  coin  or  notes  would  play  in  the  circulating 
medium  would  be  the  same  as  that  of  the  silver 
currency  of  the  past  and  present,  and  the  action  of 
credit  payments  and  of  bank  currency  must  again 
be  taken  as  much  into  account.  The  train  of  events 
to  be  expected  would  be  in  essentials  similar  to 
those  sketched  already,  as  not  improbable  results  of 
the  present  issues.  In  the  first  instance  we  might 
look  for  falling  rather  than  for  rising  prices.  The 
break-down  of  the  gold  standard  might  easily  be 
followed  by  a  shock  to  confidence  and  a  contraction 


94  THE   ECONOMIC   SITUATION. 

of  credit  which  would  cause  prices  to  fall.  Event- 
ually, when  the  gold  premium  had  become  definitive, 
and  the  commercial  and  financial  world  had  accom- 
modated itself  to  the  new  basis,  we  should  reach 
that  stage  of  higher  prices  which  it  is  the  object  of 
the  free-silver  advocates  to  secure.  But  the  result 
would  not  come  with  the  mechanical  precision 
which  they  expect.  It  would  come  gradually,  by 
movements  affecting  first  one  group  of  commodities 
and  then  another,  very  likely  with  occasional  re- 
lapses to  lower  prices.  The  final  outcome  would 
probably  be  delayed  so  long,  and  be  so  much  cov- 
ered up  in  the  meanwhile  by  other  causes  affecting 
the  general  range  of  prices,  that  the  ardent  cham- 
pions of  free  silver  would  be  grievously  disappointed 
in  the  immediate  and  visible  effects  of  their  panacea. 


PART  II. 

THE  ARGUMENT  FOR  SILVER. 


I. 

The  Bimetallist  Argument. 

We  turn  now  to  the  second  main  division  of  this 
paper :  the  discussion  of  the  general  questions  of 
policy  involved  in  the  currency  controversy.  Is  it 
desirable  that  we  should  have  more  money  ?  Does 
the  maintenance  of  the  gold  standard  involve  in- 
justice or  hardship  to  debtors,  or  to  any  class  in  the 
community?  Does  it  have  any  ill  effects  in  hamper- 
ing industry  or  checking  the  advance  of  production  ? 
Is  the  free  coinage  of  silver,  or  any  measure  leading 
ultimately  to  a  silver  basis,  fairly  open  to  the  objec- 
tions commonly  urged  against  it  on  the  grounds  of 
dishonesty  and  injustice  ? 

In  considering  these  questions,  we  must  look  to 
the  ultimate  and  permanent  results  of  the  silver 
standard.  The  details  discussed  in  the  first  part  of 
the  present  paper,  as  to  the  mode  in  which  the  silver 
issues  circulate  and  the  degree  of  promptness  with 
which  they  will  affect  prices,  are  here  of  no  great  im- 
portance.    Under  a  silver  standard  the  rise  in  prices 

95 


96  THE   ARGUMENT   FOR   SILVER. 

will  take  place  in  the  end  ;  and  we  are  concerned  with 
the  social  consequences  of  such  an  eventual  result. 

One  word  more  by  way  of  introduction  to  this 
subject.  I  shall  not  endeavor  to  discuss  all  of  the 
arguments  used  on  one  side  or  the  other,  still  less  to 
repeat  the  elementary  reasoning  which  suffices  to 
dispose  of  many  of  them.  We  have  had  in  the  last 
year  or  two  a  revival  of  the  crude  talk  of  which  so 
much  was  heard  in  the  days  of  the  inflationist  move- 
ment, about  the  blessings  of  a  large  supply  of  money, 
the  lowering  of  the  rate  of  interest  by  increasing 
the  currency,  and  indeed  the  attainment  of  universal 
prosperity  by  the  simple  process  of  putting  forth  an 
abundance  of  money.  The  same  ancient  fallacies 
which  were  advanced  in  the  years  from  1867  to  1879 
to  show  that  plenty  of  greenbacks  were  the  one  sav- 
ing thing  for  the  republic,  reappear  now  to  show 
that  plenty  of  silver  will  save  us  from  ruin.  The 
reader  who  wishes  a  discussion  of  arguments  of  this 
sort  must  turn  to  the  books  on  the  elements  of 
political  economy. 

I  propose  here  to  take  up  chiefly  one  set  of  serious 
arguments,  —  those  which  rest  on  the  changes  in  gen- 
eral prices  which  have  taken  place  throughout  the 
civilized  world  in  the  last  twenty  years.  The  con- 
clusions in  favor  of  a  wider  use  of  silver,  drawn  from 
such  changes,  have  been  maintained  by  distinguished 
economists.  It  is  true  that  the  particular  plans  for 
the  use  of  silver  which  are  now  in  vogue  in  the 
United  States  have  generally  been  opposed  by  these 
economists.  They  have  urged  international  agree- 
ments for  the  wider  use  of  silver,  and  have  depre- 


THE    BIMETALLIST    ARGUMENT.  9/ 

cated  independent  action  by  any  one  nation.  But 
the  more  thorough-going  advocates  of  free  silver  in 
the  United  States  say,  certainly  with  much  force, 
that  an  international  agreement  has  proved  to  be 
simply  impracticable,  and  that  if  the  wider  use  of 
silver  is  to  be  deferred  until  there  is  concerted  action 
by  the  great  nations,  it  will  never  come.  If  anything 
in  this  direction  is  to  be  done,  some  one  country 
must  be  courageous  enough  to  take  the  lead,  trusting 
that  others  will  follow  in  due  time.  And  certainly 
it  is  true  that  the  scheme  for  international  bimet- 
tallism  has  practically  no  prospect  of  adoption  ; 
while,  on  the  other  hand,  the  serious  arguments 
urged  by  its  advocates  tell,  in  some  degree,  in  favor 
of  any  scheme  for  enlarging  the  use  of  silver  as 
money.  These  arguments,  moreover,  are  of  weight, 
and  deserve  a  more  painstaking  consideration  than  is 
often  admitted  by  those  who  oppose  the  silver  legis- 
lation of  the  United  States. 

The  serious  and  important  arguments,  then,  among 
those  who,  both  in  this  country  and  in  Europe,  ad- 
vocate a  greater  use  of  silver  as  money,  are  derived 
from  the  general  fall  in  prices  which  has  been  so  con- 
spicuous among  the  economic  phenomena  of  the  last 
twenty  years.  To  that  fall  they  ascribe  two  evils: 
first,  an  unjust  increase  in  the  burdens  of  debtors  ; 
and,  second,  a  check  to  enterprise  and  to  the  efficient 
working  of  the  productive  machinery  of  the  com- 
munity. The  increase  in  the  burdens  of  debtors  is 
one  which  all  economists  have  pointed  to  as  the 
result  of  a  general  fall  in  prices,  or  rise  in  the  value 
of  the  circulating  medium.     The  debtor  who  borrows 


98  THE   ARGUMENT   FOR   SILVER. 

a  hundred  dollars  now,  and  repays  them  five  years 
hence,  when  all  prices  have  fallen,  gives  back  more 
than  he  received.  On  debts  running  for  short  periods 
of  time,  changes  in  general  prices  are  not  likely  to 
be  great  enough  to  cause  serious  hardship  ;  but  on 
debts  running  over  long  periods  the  loss  to  debtors 
and  the  gain  to  creditors  will  be  great  and  continuing. 
But  such  a  steady  and  continuous  fall,  it  is  urged, 
has  taken  place  since  1873  ;  and  the  fall  is  likely  to 
continue  further,  and  to  renew  its  hardships  on  each 
new  act  of  borrowing,  because  its  cause  is  a  permanent 
one.  That  cause  is  found  in  the  growing  scarcity  of 
gold,  which  has  been  selected  as  the  sole  standard 
of  value  among  civilized  countries.  The  production 
of  gold,  after  having  increased  with  great  rapidity  in 
the  twenty  years  following  the  Californian  and  Aus- 
tralian discoveries  in  1850,  has  gone  on  but  slowly 
since  1870.  Meanwhile,  the  population  of  the  civ- 
ilized countries,  their  wealth,  their  production  of 
commodities  to  be  exchanged,  have  increased  with 
extraordinary  rapidity ;  and  the  adoption  of  the 
gold  standard  by  Germany  in  1873,  and  the  resump- 
tion of  specie  payments  by  the  United  States  in  1879 
and  by  Italy  in  1883,  have  added  to  the  demands  for 
which  the  scanty  annual  supply  of  gold  must  suffice. 
Hence  the  general  fall  in  prices ;  in  other  words,  the 
appreciation  of  gold. 

The  second  effect  of  the  appreciation  of  gold,  in 
checking  industrial  progress  and  promoting  industrial 
depression,  has  been  less  insisted  on  in  the  United 
States  than  in  European  countries.  The  classic 
economists  had  generally  reasoned  that    a  general 


THE    BIMETALLIST   ARGUMENT.  99 

rise  or  fall  in  prices  was  indifferent,  except  in  regard 
to  the  relations  of  debtor  and  creditor.  If  money 
became  scarce,  if  its  value  rose  and  all  prices  fell, 
every  producer,  to  be  sure,  would  receive  a  smaller 
money  income  than  before,  and  would  have  a  smaller 
money  capital.  But  he  would  be  able  to  buy  as 
many  commodities  and  as  much  labor  as  before,  and 
would  be  in  reality  just  as  rich  and  prosperous.  In 
the  middle  of  the  eighteenth  century,  when  economic 
thought  was  just  beginning  to  assume  its  modern 
form,  David  Hume  had  argued  that  though  a  fall  in 
prices  is  at  bottom  indifferent  to  everybody  (except 
as  debtor  or  creditor),  it  would  yet,  in  its  effects  on 
men's  spirits  and  expectations,  which  are  all  con- 
nected with  money  and  with  terms  of  money,  exert 
a  depressing  influence  on  industry,  and  would  so  be 
harmful  ;  while  rising  prices,  though  also  really  in- 
different to  all,  would  stimulate  hope  and  confidence, 
and  so  arouse  to  more  active  exertion  and  more 
plentiful  production.  The  younger  Mill,  in  his 
Political  Economy,  thought  it  worth  while  to  enter 
on  a  careful  refutation  of  Hume's  reasoning.  But 
the  bimetallists  of  our  time  arc  disposed  to  agree 
with  the  shrewd  Scotchman.  They  say  that  the 
active  manager  of  industry,  the  business  man  or 
entrepreneur,  in  the  first  place  is  always  more  or  less 
in  debt  ;  in  the  second  place,  is  always  buying  labor, 
or  materials,  or  goods,  with  the  intention  of  selling 
a  product  at  a  later  date  at  an  advance  in  price.  He 
habitually  measures  his  gains  in  terms  of  money, 
and  not  in  terms  of  the  commodities  he  can  buy  with 
the   money.     In   times  when  prices  are   falling,   he 


IOO  THE   ARGUMENT   FOR   SILVER. 

finds  it  harder  to  meet  his  debts,  and  to  dispose  of 
his  goods  in  hand  at  a  money  advance  over  what 
they  cost  him.  But  the  business  man,  or  entre- 
preneur, in  our  day  is  the  director  and  initiator  of 
industry.  He  employs  labor,  borrows  capital,  sets 
the  wheels  of  industry  in  motion  ;  it  is  his  expecta- 
tions and  fears  and  hopes  which  determine  primarily 
whether  the  investment  of  capital  shall  take  place  in 
large  or  small  amount,  and  whether  the  machinery 
of  production  shall  move  smoothly  and  effectively, 
or  slowly,  hesitatingly,  inefficiently.  The  argument 
certainly  does  not  lack  plausibility  ;  nor  can  it  be 
said  to  have  often  been  squarely  met.  No  doubt  it 
takes  the  form,  in  the  United  States,  more  frequently 
of  confused  encomiums  on  the  inspiriting  effects  of 
plentiful  money,  than  of  direct  reasoning  as  to  the 
ill  effects  of  too  little  money,  such  as  I  have  endeav- 
ored to  state  with  fairness  in  the  preceding  sentences. 
Yet  it  does  not  lack  weighty  backing.  So  eminent 
an  economist  as  President  Francis  A.  Walker  has, 
within  a  year  or  two,  insisted  on  the  evils  of  a 
deficient  supply  of  money  as  strangling  the  arteries 
of  industrial  life.1 

1  "  The  money  supply  is  not  a  matter  of  no  consequence.  Alike 
considerable  excess  and  considerable  deficiency  inevitably  become  the 
source  of  direful  ills  and  woes  unnumbered.  If  of  an  irredeemable 
and  fluctuating  paper  currency,  that  alcohol  of  commerce,  it  can  be 
said  that  '  it  biteth  like  a  serpent  and  stingeth  like  an  adder,'  with 
equal  truth  may  it  be  added  that  strangulation,  suffocation,  are  not 
words  too  strong  to  express  the  agony  of  the  industrial  body  when 
embraced  in  the  fast-tightening  folds  of  contracting  money  supply. 
Unfortunately  those  who  should  now  be  on  deck  as  pilots  to 
guide  the  ship  of  State  through  the  narrow  sea  that  separates  the 
whirling  gulf  of  silver  monometallism,  with  a  premium  on  gold  and 


THE    BIMETALLIST   ARGUMENT.  IOI 

On  the  whole,  however,  the  other  argument,  bear- 
ing on  the  increase  in  the  burdens  of  debtors  under 
falling  prices,  has  been  more  often  heard  in  the 
United  States,  and  certainly  has  been  of  more  effect. 
Prosperity,  activity,  general  industrial  advance,  have 
been  in  this  country  so  great  and  so  obvious  that  the 
argument  as  to  any  check  to  industry  could  take 
serious  hold  only  in  occasional  periods  of  depression 
or  slackened  advance.  The  burden  on  American 
debtors  from  falling  prices  has  therefore  been  much 
more  steadily  complained  of,  chiefly  in  regard  to  the 
debts  of  the  farmers  and  other  borrowers  on  a  com- 
paratively small  scale.  No  doubt  there  are  other 
debtors  whose  burdens  are  affected  at  least  as  much, 
notably  the  railways,  among  whom  the  practice  of 
borrowing  heavily  on  long  time  has  sometimes  had 
its  serious  effects.  But  it  is  the  farmer  whose  case 
has  received  most  attention,  and  in  some  ways 
doubtless  has  deserved  it  most. 

The  discussion  of  the  relations  of  debtors  and 
creditors  under  the  gold  standard  has  led  to  some 
further  conclusions  as  to  the  "  honesty  "  of  the  gold 
and  silver  standards.  Those  who  oppose  a  silver 
basis  speak  of  the  silver  dollar  as  a  "  dishonest  "  coin. 
But  those  who  attack  the  gold  standard  retort  that 
the  really  dishonest  dollar    is   that  of  gold.      It   is 

a  debased  coinage,  from  the  bare  and  jagged  rocks  of  gold  mono- 
metallism, with  increasing  monetary  stringency  and  falling  prices, 
have  discredited  themselves  with  captain  and  crew  by  denying  the 
very  existence  of  Scylln,  and  declaring  that  on  that  side  is  the  broad 
and  open  sea." —  Address  of  President  Francis  A.  Walker  before  the 
American  Economic  Association,  December  26,  1890  ;  in  the  Publica- 
lions  of  the  Association,  vol.  vi.,  p.  32. 


102  THE   ARGUMENT   FOR   SILVER. 

pointed  out  by  them  that  the  fall  in  the  price  of 
silver  which  has  taken  place  since  1873  has  not  been 
greater  than  that  in  the  prices  of  commodities  gen- 
erally. As  compared  with  commodities,  therefore, 
silver  has  been  more  steady  in  value  than  gold.  The 
fall  in  the  gold  price  of  silver,  which  is  adduced  by 
the  monometallists  to  show  that  silver  is  not  a  good 
standard  of  value,  is  said  to  be  the  very  thing  which 
proves  it  to  be  a  good  standard  of  value  ;  for  a  given 
amount  of  silver  will  buy  the  same  amount  of  com- 
modities, roughly,  as  it  would  twenty  years  ago, 
while  a  given  amount  of  gold  will  buy  more.  If 
debts  had  been  expressed  in  terms  of  silver,  the 
debtor  would  have  had  to  repay  the  creditor  the 
same  amount  of  commodities  that  he  received,- — not 
more  commodities,  as  he  has  had  to  do,  with  debts 
measured  and  repaid  in  terms  of  gold.  So  far  as  the 
attainment  of  the  closest  possible  approach  to  ideal 
justice  is  concerned,  a  silver  standard  would  have 
served  the  purpose  better  than  a  gold  one. 

It  would  extend  this  paper  to  undue  length  if  I 
were  to  enter  on  any  detailed  consideration  of  the 
intricate  questions  which  arise  in  regard  to  the  history 
a-nd  statistics  of  general  prices.  By  far  the  best  and 
most  convenient  source  of  information  is  Professor 
Soetbeer's  well-known  Materials  on  the  Precious 
Metals  and  the  Question  of  Standards,  published  in 
Germany  in  1887.1  For  convenience  of  reference  I 
give  below  Professor  Soetbeer's  "  index  numbers," 
indicating  the  average  annual  prices  of   1 14  articles 

1  An  English  translation  is  in  Mr.  Edward  Atkinson's  "  Report  on 
Bimetallism  in  Europe,"  printed  in  the  United  States  Documents, 
Senate  Exec.  Doe.,  50th  Cong.,  1st  session,  Xo.  34. 


THE    HIMETALLIST    ARGUMENT. 


IC 


at  the  free  port  of  Hamburg:  undoubtedly  the  most 
complete  and  satisfactory  compilation  of  the  sort 
which  has  yet  been  made.  The  figures,  as  given  in 
the  Materials,  run  through  the  year  1885.  For  the 
years  from  1886  to  1890  I  have  added  index  numbers 
based  on  the  same  sources,  which  Professor  Soetbeer 
has  kindly  supplied  to  me.  Unfortunately  the  ma- 
terial on  which  these  figures  are  based  has  not  been 
available  since  1888.  I  need  hardly  say  that  the 
method  of  measuring  prices  by  index  numbers  based 
on  simple  arithmetical  averages  is  far  from  perfect. 
The  figures  are  given  chiefly  by  way  of  illustrating  in 
some  concrete  way  the  tendency  to  falling  prices. 

For  convenience,  I  have  added  the  price  of  silver 
in  terms  of  dollars  per  fine  ounce,  as  given  by  the 
Director  of  the  United  States  Mint. 


Average  of  1847-50 

"  '^5i-55 
'•  1856-60 
"  1861-65 
"   1866-70 

Yeai    1871 

"      187* 

'      «873 

"      1874 

"  1875 

"  1876 

"  '877 

"  1878 

"  '^79 

"  1SS0 

"  1S81 

"  1882 

"  1883 

"  1884 

"  1885 

•'  1886 

"  1887 

"  1888 

"  1889 

"  1890 


Index    Number   of 
General  Prices. 


Price    of    Silver 

per  Ounce 

in  Terms  of  Gold. 


IOO 

112.22 

I2O.9I 

■23-59 

123  57 

127.03 

$1,326 

135.62 

1.322 

138.28 

1.298 

136.20 

1.278 

129.85 

1.246 

128.33 

1. 1 56 

127  70 

1. 201 

120.60 

1. 152 

117. 10 

1.1 23 

121  89 

1. 149 

121  07 

1.138 

122.14 

1.136 

122.24 

1. 110 

114.25 

1. 113 

108  72 

1.065 

103  99 

•995 

102  20 

.978 

101.93 

•939 

106.13 

•935 

108..  13 

1.046 

II. 

The  Effect  of  Improvements  in  Production. 

The  bimetallist  agitation  for  a  return  to  the  wider 
use  of  silver  concurrently  with  gold  first  became 
prominent  in  the  years  of  depression  which  followed 
the  crisis  of  1873.  For  some  time  those  who  opposed 
it  took  the  ground  that  the  alleged  evils  did  not 
exist, — that  in  fact  there  had  been  no  permanent  fall 
in  general  prices.  The  decline  in  the  years  after 
1873  was  supposed  to  be  simply  the  usual  reaction 
from  the  rise  in  prices  which  marks  a  period  of  spec- 
ulative activity.  It  was  expected  that  the  upward 
movement  of  the  next  period  of  activity  would  bring 
the  average  range  of  prices  as  high  as  it  had  been 
before.  The  general  revival  which  set  in  after  1879 
in  all  civilized  countries  did  indeed  check  the  down- 
ward tendency,  and  in  some  countries  brought  about 
an  appreciable  rise.  But  this  counter-movement  by 
no  means  offset  the  marked  fall  which  had  preceded 
it  ;  and  in  any  case  it  soon  came  to  an  end,  and  was 
followed  by  a  new  fall,  which  has  continued  with  no 
considerable  interruption  to  our  own  time.  It  is  true 
that  some  part  of  the  fall  is  no  more  than  a  recoil 
from  the  abnormally  high  prices  of  the  years  1 871-73. 
It  is  true,  also,  that  some  commodities  have  shown 
a  tendency  to  rise,  and  that   in   one  very  important 

104 


EFFECT    OF    IMPROVEMENTS    IN"    PRODUCTION.       105 

respect, — in  money  incomes  and  the  money  rate  of 
wages, — there  has  been  a  striking  exception  to  the 
general  movement.  Further,  it  must  be  borne  in 
mind  that  even  the  lowered  level  which  has  now  been 
reached  cannot  be  described  as  abnormally  low,  being 
still  as  high  as  that  which  obtained  at  the  middle  of 
the  present  century.  But,  on  the  whole,  the  fact  of 
a  general  fall  in  the  prices  of  commodities  during 
the  last  fifteen  or  twenty  years  cannot  be  denied. 
The  fall  has  not  been  uninterrupted;  it  has  not  been 
so  rapid  or  general  as  to  bear  on  the  face  of  it  proof 
of  harmful  results  ;  but  it  has  been  steady,  and,  in 
the  opinion  of  the  present  writer  at  least,  is  likely  to 
continue  slowly  and  steadily  for  some  time  to  come. 
Recently,  therefore,  those  who  combat  the  bi- 
metallist  reasoning  have  taken  a  different  position. 
They  have  reasoned  that  while  prices  may  in  fact 
have  gone  down,  the  fall  is  not  due,  as  the  bimetal- 
lists  allege,  to  an  appreciation  of  gold.  It  is  to  be 
accounted  for,  they  say,  by  other  causes,  notably 
by  the  extraordinary  improvements  in  the  production 
of  commodities.  New  inventions  and  the  perfecting 
of  old  ones  have  cheapened  almost  all  manufactured 
articles.  Raw  materials  and  food  products  have  been 
cheapened  partly  by  the  discovery  of  newr  sources  of 
supply,  and  partly  by  that  improvement  which  has 
been  transforming  the  industrial  situation  more  radi- 
cally than  any  other, — the  wonderful  cheapening  of 
transportation  by  railways  and  steamships,  which  has 
made  the  resources  of  the  plains  of  our  West  and 
of  the  sheep-runs  of  Australia  available  for  the 
supply  of  the  markets  of  London  and   New  York. 


106  THE    ARGUMENT    FOR    SILVER. 

So  far  as  this  train  of  reasoning  undertakes  to 
explain  the  mode  in  which  the  fall  in  prices  has  been 
brought  about,  it  seems  to  me  impregnable.  But  in 
so  far  as  it  endeavors  to  disprove  the  appreciation  of 
gold,  or  to  show  that  the  general  fall  is  not  due 
to  this  appreciation,  I  have  never  been  able  to  see  its 
force.  In  truth,  both  the  bimetallists  and  their 
opponents  seem  to  confuse  the  question  when  they 
speak  of  the  appreciation  of  gold  as  causing  lower 
prices.  The  appreciation  of  gold  is  the  general  fall 
in  prices.  The  two  are  not  related  as  cause  and 
effect  ;  they  are  simply  two  names  for  one  and  the 
same  thing, — namely,  a  different  rate  of  exchange 
between  gold  on  the  one  hand  and  commodities 
in  general  on  the  other,  by  which  the  same  amount 
of  gold  buys  more  commodities  than  before.  When 
the  general  fall  in  prices  is  admitted,  the  case  of  the 
bimetallists  as  to  the  appreciation  of  gold  is  estab- 
lished once  for  all.  Improvements  in  the  production 
of  commodities  may  explain  how  it  happens  that  they 
are  more  abundant,  and  exchange  on  less  favorable 
terms  with  gold,  of  which  the  quantity  has  not  been 
increased  by  new  rich  mines  or  great  improvements 
in  production  ;  but  the  fact  of  the  depreciation  of 
commodities,  or  of  the  appreciation  of  gold,  is  not 
thereby  explained  away. 

Nevertheless,  the  improvements  in  production  do 
seem  to  me  to  have  an  important  bearing  on  the 
question  in  hand  :  a  bearing  not  on  the  simple  fact 
of  the  appreciation  of  gold,  but  on  the  social  conse- 
quences which  are  said  to  flow  from  it,  and  therefore 
on  the  questions  of    policy  which    are    here  under 


EFFECT   OF   I  IMPROVEMENTS   IN    PRODUCTION.       I07 

consideration.  A  moment's  thought  will  show,  fof 
example,  that  a  general  increase  in  the  efficiency  oi 
labor  affects  very  materially  the  mode  in  which  a 
fall  in  prices  acts  on  the  relations  of  debtor  and 
creditor.  If  A  lends  to  B  a  hundred  dollars,  re- 
payable in  five  years,  and  if  at  the  end  of  the  five 
years  prices  in  general  have  fallen  to  one  half  of  the 
previous  rates,  B,  in  paying  back  to  A  the  one  hun- 
dred dollars,  clearly  returns  twice  as  many  commodi- 
ties as  he  got.  But  if,  at  the  same  time,  the  efficiency 
of  labor  has  been  doubled  by  improvements  in  pro- 
duction, B  can  produce  with  the  same  labor  twice 
as  many  commodities  as  before  ;  and  he  returns  to 
A  the  product  of  the  same  quantity  of  labor  as  he 
received.  The  classic  economists  and  the  socialists 
(at  least  some  schools  of  socialists)  have  maintained 
alike  that  the  ideally  perfect  standard  of  justice  in 
the  exchange  of  commodities  and  service  is  equality 
of  sacrifice  or  labor;  that,  if  things  so  exchanged  for 
each  other  that  equal  sacrifice  got  the  same  reward, 
complete  justice  would  be  attained.  Applying  this 
test  to  the  relations  of  debtor  and  creditor  in  the 
case  supposed,  we  find  it  not  one  of  hardship  to  the 
debtor,  but  apparently  one  of  justice  to  both  parties. 
It  is  true  the  creditor  gets  more  commodities  than  he 
gave  ;  but  he  gets  the  product  of  the  same  amount  of 
labor  as  he  devoted  to  the  commodities  originally 
lent ;  and  why  should  he  not  share  with  the  rest  of 
the  community  the  benefits  of  a  general  increase  in 
the  productiveness  of  labor? 

This  line  of    reasoning  will    become  simpler  and 
more  concrete  if  we  approach  it  from  another  point 


I08  THE   ARGUMENT   FOR   SILVER. 

of  view.  Reference  has  already  been  made  to  the 
most  striking  and  important  exception  to  the  general 
tendency  of  prices  to  fall,  namely,  that  money  wages 
and  incomes  in  all  civilized  countries  have  shown  a 
tendency  not  to  fall,  but  to  rise.  Whether  the  in- 
comes of  the  rich  have  increased  faster  than  those  of 
the  poor,  or  whether  the  movement  has  shown  itself 
with  rough  uniformity  for  all  classes,  is  immaterial 
for  the  present  discussion.  The  admitted  fact  of 
a  general  upward  movement  alike  among  rich, 
middle  class,  and  poor,  is  the  significant  thing.  In 
other  words,  there  has  been  an  inverse  movement  of 
money  wages  and  of  the  prices  of  commodities,  the 
one  going  up  while  the  other  went  down.  Now, 
such  an  inverse  movement  is  what  must  take  place  in 
case  of  any  real  improvement  in  material  welfare. 
The  only  concrete  way  in  which  civilized  people  can 
become  better  off,  is  by  being  able  to  buy  more, — by 
their  money  incomes  going  further  in  the  purchase  of 
commodities.  The  improvement  may  take  the  form 
either  of  higher  money  incomes,  with  stationary 
prices  ;  or  that  of  stationary  incomes  with  lower 
prices;  or  the  intermediate  form,  which  in  fact  seems 
to  have  occurred,  of  money  incomes  rising  somewhat 
and  prices  at  the  same  time  falling  somewhat.  If 
we  assume  a  monetary  supply  that  is  limited,  or  does 
not  increase  as  fast  as  improved  means  of  production 
cause  the  quantities  of  commodities  to  increase,  one 
or  the  other  of  the  two  forms  last  mentioned  must  be 
found.1 

1  Such  an  inverse  movement  of  general  wages  and   prices  was  pre- 
dicted by  Cairnes   before  the    bimetallic   controversy   had  attracted 


EFFECT   OF   IMPROVEMENTS    IN   PRODUCTION.       IO9 

In  such  a  state  of  things  there  can  hardly  be  said 
to  be  any  real  hardship  for  the  debtor.  It  is  true 
that  prices  have  fallen,  and  that  the  money  he  repays 
the  creditor  will  buy  more  goods  than  it  did  when 
the  loan  was  contracted  ;  but  his  own  money  income 
has  risen,  or  at  least  has  not  fallen,  and  the  repay- 
ment of  the  loan  can  cause  him  no  special  hardship, 
— none  greater  than  he  must  have  expected.  The 
case  clearly  differs  fundamentally  from  that  of  a 
simple  rise  in  the  value  of  money,  or  general  fall  in 
both  prices  and  wages.  In  the  latter  case,  money 
incomes  as  well  as  the  prices  of  commodities  fall,  and 
the  debtor  really  pays  back  more  than  he  got,  not 
only  in  terms  of  commodities,  but  in  terms  of  labor 
or  sacrifice  or  income.  This  result  ensues,  for  ex- 
ample, whenever  there  is  the  return  to  specie  pay- 
ments  from  a  period  of  excessive  paper-money  issues, 
such  as  the  United  States  went  through  after  the 
Civil  War.  The  return  to  specie  payments,  and  the 
general  fall  in  both  prices  and  incomes,  then  meant 
an  increase  in  the  burden  of  debts  contracted  in  the 
time  of  inflated  paper  prices.  The  return  to  specie 
payments,  instead  of  taking  place  quickly  and  deci- 
sively after  the  financial  stress  of  the  war  ceased, 
was  postponed,  and  was  not  finally  accomplished 
until  1879.  In  tne  years  before  the  crisis  of  1873, 
when  the  paper  issues  were  still  excessive,  and  other 
causes  also  helped  to  keep  prices  high,  borrowing 
took  place  on  a  large  scale, — borrowing  by  farmers 
and   individuals,  as   well   as  by    large    corporations. 

general  attention   to    the   problem  ;    see  his    Leading  Principles  of 
Political  Economy,  Book  II.,  ch.  ii.,  §  8. 


IIO  THE   ARGUMENT   FOR   SILVER. 

The  general  fall  which  began  even  before  1873,  and 
became  great  after  that  year,  undoubtedly  increased 
the  burden  of  these  debts,  adding  another  illustration 
of  the  evils  which  ensue  from  the  excessive  issue  of 
inconvertible  paper  money.  The  harsh  experience 
of  that  time  undoubtedly  did  much  to  strengthen 
the  inflationist  movement ;  and  the  after-effects  of  it, 
as  well  as  the  memory  of  it,  contribute  to  the  silver 
agitation  of  the  present.  But  the  fall  in  prices  in  the 
United  States  since  1879,  an<^  tnat  ni  European 
countries  in  the  period  since  1873,  are  the  result,  on 
the  whole  and  in  the  long  run,  of  very  different 
causes.  They  have  been  due  chiefly  to  the  general 
improvements  in  production ;  they  have  not  been 
accompanied  by  a  fall  in  money  incomes,  and  they 
cannot  be  said  to  have  caused  an  increase  on  the 
burden  of  debtors. 

The  reasoning  of  the  preceding  paragraphs  bears 
also  on  the  second  part  of  the  bimetallist  indictment, 
— that,  namely,  as  to  the  depressing  effects  of  falling 
prices  on  industrial  enterprise.  Whether  a  simple 
rise  in  the  value  of  money,  unaccompanied  by  any 
other  circumstance,  would  have  the  depressing  effects 
which  the  bimetallists  predict  and  the  classic  econo- 
mists deny,  is  a  question  radically  different  from  that 
which  in  fact  presents  itself.  It  may  be  that  in  this 
simple  case  the  bimetallists  might  prove  to  be,  in 
some  degree  at  least,  in  the  right,  and  that  the  classic 
reasoning,  here  as  on  many  other  subjects,  while 
sound  in  the  long  run,  would  need  some  qualifications 
and  correction.  In  the  long  run,  no  doubt,  it  is  im- 
material whether  prices  are   high    or    low,  whether 


EFFECT   OF  IMPROVEMENTS    IN    PRODUCTION.       I  1  I 

money  returns  fall  or  rise;  and  yet  it  might  turn  out 
that  the  habitual  association  of  gain  or  loss  with 
"  making  money  "  would  cause  a  period  of  simple 
falling  prices  to  be  one  of  hesitating  investment  of 
capital  and  unenterprising  conduct  of  business.  But 
what  the  world  in  fact  has  seen  has  been  the  complex 
case  of  a  fall  in  prices  accompanied  by  great  im- 
provements in  production.  The  business  man  and 
capitalist  has  had,  to  be  sure,  to  deal  with  falling 
prices ;  but  the  same  amount  of  capital  and  labor 
has  turned  out  more  commodities  than  before ;  and 
his  total  money  returns,  so  far  from  declining,  have 
generally  increased.  The  money  incomes  of  the 
managers  of  industry  have  shown  the  same  upward 
movement  as  the  money  incomes  of  other  classes  in 
society.  So  long  as  this  is  the  case,  it  is  idle  to  talk 
of  a  depressing  effect  on  enterprise  from  the  fall  in 
prices,  or  of  a  strangling  of  the  industrial  organism 
from  insufficiency  of  the  circulating  medium.  In  fact, 
the  immediate  cause  of  the  fall  in  prices  has  been  the 
pushing  on  the  market  for  sale  of  larger  and  larger 
quantities  of  commodities,  produced  with  profit  at 
lower  and  lower  cost :  a  state  of  things  fortunate  for 
the  community,  and  surely  not  depressing  for  the 
business  man.  No  doubt  the  fall  in  prices  has  been 
depressing  to  those  producers  who  were  not  so 
shrewd  or  so  fortunate  as  to  possess  themselves  of 
the  improved  means  of  production,  and  who  have 
had  to  sell  the  same  quantity  of  goods,  brought  to 
market  at  as  high  a  cost  as  ever,  at  lower  pricey  than 
before.  But  these  unlucky  or  incompetent  persons 
would  have  had  to  go  to  the  wall  in  any  case,  whether 


112  THE   ARGUMENT   FOR   SILVER. 

prices  maintained  themselves  or  went  down,  and 
their  case  does  not  represent  the  general  trend  of 
industrial  operations. 

This  effect  on  the  entrepreneur  of  improvements 
and  of  falling  prices  combined,  doubtless  accounts 
for  the  failure  of  the  bimetallist  agitation  to  secure 
any  appreciable  hold  in  the  business  world.  The  bi- 
metallists,  both  in  England  and  on  the  Continent, 
have  labored  zealously  to  engage  support  among  the 
business  men,  but  never  with  a  degree  of  success  at 
all  proportionate  to  the  energy  displayed.  The  sim- 
ple reason  is  that  the  business  world  has  not  been  in 
any  state  of  chronic  depression.  In  the  ups  and 
downs  of  industrial  activity  there  have  been  periods 
which  seem  to  confirm  the  pessimistic  accounts  of 
the  bimetallist  and  of  other  persons  malcontent  with 
the  present  order  of  things  ;  but  in  due  time  the  tide 
has  always  turned.  The  industrial  situation,  while 
far  from  perfect  in  the  eye  of  the  social  philosopher, 
and  by  no  means  warranting  any  confident  optimism 
as  to  the  final  outcome,  has  certainly  not  been  such 
as  to  dissatisfy  the  active  manager  of  industry,  or  to 
check  his  ambition  or  enterprise. 

On  the  whole,  then,  the  fall  in  prices,  when  con- 
sidered in  connection  with  the  other  great  changes 
which  have  accompanied  it,  does  not  afford  so  much 
countenance  to  the  bimetallist  proposal  as  at  first 
sight  it  seems  to.  The  rise  in  money  incomes  and 
the  improvements  in  production  disprove  any  in- 
tolerable burden  on  debtors,  and  make  it  highly 
improbable  that  the  change  has  had  any  general 
depressing  effect  on  industry. 


III. 

The  Case  of  the  Farmer. 

Nevertheless,  there  is  something  more  to  be  said, 
in  explanation  and  justification  of  the  discontent 
with  falling  prices,  and  of  the  currency  agitation  which 
rests  on  that  discontent.  While  the  effects  of  the 
fall  in  prices  on  debtors  as  a  class  and  on  producers 
as  a  whole  have  not  given  real  grounds  for  complaint, 
certain  particular  debtors  and  producers  have  un- 
doubtedly been  injured.  The  case  of  these  latter 
has  given  plausibility  to  the  general  arguments  of 
the  bimetallists,  and,  what  is  more  important  at  the 
present  juncture,  has  given  strength  to  the  move- 
ment in  the  United  States  for  more  money  and 
more  silver. 

The  situation  will  be  best  understood  if  we  con- 
trast for  a  moment  the  different  modes  in  which  the 
improvements  in  production  have  been  brought 
about  in  manufacturing  industries  on  the  one  hand, 
in  agriculture  on  the  other  hand.  In  manufactures 
the  improvements  have  been  better  machinery,  new- 
processes,  labor-saving  inventions,  the  conduct  of 
business  on  a  larger  scale,  and  so  the  greater  and 
more  effective  division  of  labor.  In  agriculture  the 
main  cause  of  cheaper  production  has  been  different : 
it   has  been  the  opening  up  of  new  lands   and  new 

8 

113 


114  THE   ARGUMENT   FOR   SILVER. 

sources  of  supply.  No  doubt  there  are  important 
exceptions  to  these  general  statements.  In  agri- 
culture there  have  been  advances  in  the  arts, — new 
plants,  better  fertilizers,  improved  implements,  more 
effective  ways  of  cultivating  the  soil.  In  manufac- 
tures, on  the  other  hand,  there  have  been  important 
changes  due  to  the  discovery  of  new  and  rich  mines 
of  materials,  such  as  coal,  iron,  copper.  But,  on  the 
whole,  the  difference  holds  good.  In  agriculture 
undoubtedly  the  opening  of  new  lands  through  the 
improvements  in  transportation  has  been  the  most 
important  single  cause  at  work.  The  cheapening  of 
agricultural  products  has  been  due  not  so  much  to 
the  more  effective  use  of  the  soil  already  under  cul- 
tivation, as  to  the  development  of  soil  not  formerly 
available  for  the  supply  of  the  market. 

The  changes  in  production  and  prices  have  conse- 
quently affected  the  producers  in  these  two  branches 
of  production  in  very  different  ways.  In  manufac- 
tures all  alike  have  felt  them,  and  have  been  able  to 
accommodate  themselves  to  the  effects.  No  doubt 
the  shrewder  producers  adopt  improvements  and 
new  inventions  first,  and,  so  long  as  they  keep  it  in 
the  lead,  have  the  advantage  of  their  competitors. 
They  gain  by  doing  a  large  business  at  lower  prices, 
while  for  the  time  being  their  slower  competitors 
lose.  But  new  processes  and  new  inventions  spread 
over  the  whole  field  in  no  long  time.  The  opening 
of  a  new  source  of  supply,  on  the  other  hand,  cheap- 
ens production  through  a  process  which  the  holders 
of  the  old  source  of  supply  cannot  avail  themselves 
of.     If  wheat  is  raised  in  large  quantities  in  Dakota, 


THE   CASE   OF   THE   FARMER.  I  I  5 

the  price  goes  down  as  effectively  as  if  the  wheat 
fields  of  England  and  New  York  had  suddenly  be- 
come more  fertile  ;  but  as  those  wheat  fields  produce 
no  more  than  before,  the  farmer  or  land  owner  on 
the  old  soil  has  nothing  to  offset  the  lower  price. 
This  is  the  explanation  of  the  agricultural  distress 
of  which  so  much  has  been  heard  in  Europe  in  re- 
cent years,  and  which  has  been  the  main  occasion  of 
the  revival  of  protectionist  feeling  in  France,  Ger- 
many, and  other  countries  of  the  Continent.  The 
farmer  on  the  old  lands  does  not  find  in  improve- 
ments in  production  any  compensation  for  lower 
prices.  If  he  owns  the  land,  he  must  pocket  the  loss, 
and  perhaps  in  the  end  abandon  his  land  and  turn 
to  something  else  ;  such  has  been  a  common  case  in 
New  England.  If  he  is  a  tenant  on  the  land,  he  will 
probably,  after  a  period  of  struggle  and  hardship, 
get  lower  rents,  leaving  the  landlord  as  the  perma- 
nent sufferer  ;  such  has  been  the  outcome  in  old 
England.  If  he  was  in  debt  before  the  change  took 
place,  he  will  find  his  debts  growing  more  burdensome 
as  his  money  income  goes  down  :  such  has  been  the 
result  with  many  a  western  farmer. 

It  is  in  causes  of  this  sort  that  we  find  the  expla- 
nation, in  part  at  least,  of  the  restlessness  among  the 
western  farmers  of  which  the  silver  agitation  is  one 
sign.  The  fall  in  the  prices  of  wheat,  corn,  and  other 
staples,  has  been  due  to  enormously  increased  produc- 
tion in  regions  which  were  formerly  out  of  reach  of 
the  market  :  in  India,  Australia,  Russia,  as  well  as  in 
California,  Dakota,  Washington,  Oregon,  and  the  far 
West  generally.     In   the  States  where  the  land  has 


Il6  THE   ARGUMENT   FOR   SILVER. 

been  under  cultivation  for  a  generation,  like  Michi- 
gan, Wisconsin,  Indiana,  Illinois,  Iowa,  Missouri, — 
almost  the  whole  of  the  Mississippi  valley  proper, — 
the  fall  in  the  prices  of  agricultural  staples  has  meant 
a  serious  loss  to  the  farmer,  and  serious  embarrass- 
ment to  him  if  in  debt.  He  had  expected  with  a 
bushel  of  wheat  to  meet  a  dollar  of  interest  or  repay 
a  dollar  of  principal  ;  he  finds  he  needs  two  bushels. 
It  is  not  surprising  if  in  the  United  States  he  wants 
higher  prices  to  be  attained  by  the  issue  of  more 
silver  or  more  money  of  some  sort,  and  if  on  the 
Continent  of  Europe  he  asks  for  protective  duties  on 
the  products  which  stream  in  from  distant  countries. 

We  touch  here  the  question,  so  much  discussed  of 
late,  as  to  the  causes  of  the  recent  agricultural  depres- 
sion in  the  United  States.  That  depression  has  been 
by  no  means  due  exclusively  to  the  change  in  pro- 
duction and  prices  just  described.  Other  causes 
must  be  taken  into  account  if  the  situation  is  to  be 
fully  and  fairly  explained  ;  and  a  few  words  in  regard 
to  them  will  not  carry  us  too  far  from  the  main  sub- 
ject of  this  paper. 

In  the  first  place,  it  is  probable  that  some  of  the 
complaints  in  regard  to  the  burden  of  debt  on  the 
farmers  are  simply  a  legacy  from  the  old  days  of 
inflated  paper  money.  Not  a  few  of  the  debts  of 
the  present  go  back  to  the  years  before  1870,  when 
we  had  prices  high  in  terms  of  over-issued  paper 
money.  These  debts  have  been  renewed  and  con- 
tinued, in  whole  or  in  part ;  and  the  fall  in  prices  has 
made  them  heavier  and  heavier  to  bear.  The  evil 
here  again  is  real,  and  a  remedy  is  now  hard  to  find. 


THE   CASE   OF   THE   FARMER.  117 

The  only  conclusion  which  can  be  laid  down  with 
perfect  conviction  is  that  we  should  make  sure  of 
preventing  the  recurrence  of  a  new  era  of  excessive 
paper  money. 

Next,  the  fall  in  prices  happens  to  have  been  inten- 
sified in  the  last  few  years  by  one  of  those  periodic 
stages  of  general  depression  which  have  recurred 
again  and  again  in  our  economic  history.  The  process 
of  settling  the  country  and  taking  up  the  new  lands 
of  the  United  States  has  never  taken  place  by  regular 
and  steady  steps.  It  has  taken  place  by  spells  of 
great  activity,  accompanied  by  land  speculation  and 
rapid  railway  building,  followed  by  periods  of  dul- 
lness and  reaction,  in  which  the  advance  for  the  time 
being  has  almost  ceased.  At  intervals  of  ten  years, 
more  or  less,  the  population  has  gone  West  too  fast, 
and  then  has  waited  to  recover  and  take  breath  for 
a  new  effort.  In  general,  the  tendency  has  been  to 
take  up  new  lands  quite  as  fast  as,  if  not  faster  than, 
there  was  profitable  use  to  be  made  of  them.  The 
desire  to  secure  the  almost  certain  future  rise  in  value 
has  caused  men  to  appropriate  land  and  use  it  before 
the  world  really  needed  its  product.  Such  a  rapid 
advance  seems  to  have  taken  place  in  the  years  1887 
and  1888,  indicated  by  the  enormous  railway  build- 
ing and  the  rapid  increase  in  the  population  of  the 
far  West.  The  usual  reaction  has  followed,  with  its 
lower  prices  of  agricultural  products  and  of  farming 
land.  Some  part  of  the  agricultural  depression  of 
1889  and  1890  represents  no  more  than  this  periodical 
downward  turn.  The  next  turn  upward  may  be 
expected  to  come  in  due  time  ;  and  with  it  we  shall 


Il8  THE   ARGUMENT   FOR   SILVER. 

probably  hear  less  of  depression  in  farming,  and  may 
expect  the  silver  agitation,  the  Farmers'  Alliance, 
and  kindred  movements,  to  wane,  and  perhaps  to 
disappear  entirely. 

Still  another  important  circumstance  is  the  general 
transition  in  agricultural  methods  inevitable  in  those 
western  States  which  have  been  settled  for  a  genera- 
tion or  more.  When  new  land  is  first  taken  into 
cultivation  the  most  effective  use  of  it  is  found  in  the 
continuous  production  of  some  staple  crop  like  wheat 
and  corn,  which  can  be  grown,  so  long  as  the  cream 
of  the  soil  is  not  exhausted,  year  after  year  with 
large  returns.  After  a  while,  however,  the  land 
begins  to  show  signs  of  exhaustion.  The  staple 
crops  do  not  yield  as  largely  as  before,  and  less  crude 
methods  of  using  the  soil  must  be  resorted  to. 
Manures  have  to  be  applied,  and  the  rotation  and 
selection  of  crops  practised.  Meat  and  dairy  pro- 
ducts, vegetables,  fruits,  and  the  miscellaneous  agri- 
cultural articles,  must  take  their  place  in  rural 
economy.  This  change  has  been  carried  through 
very  largely  in  States  like  New  York,  Pennsylvania, 
and  Ohio.  In  the  heart  of  the  Mississippi  valley 
it  is  now  under  way  ;  but  the  transition  is  trying, 
and  to  some  of  the  farmers  it  is  impossible.  A 
good  share  of  the  American  agricultural  population 
has  been  so  steadily  bred  to  the  easy  and  careless 
use  of  virgin  soil  that  it  cannot  accommodate  itself 
to  more  intensive  methods.  It  is  constantly  mov- 
ing westward  ;  settling  for  a  generation  in  one  spot, 
and  then,  as  the  land  shows  signs  of  exhaustion, 
moving  farther  west.     The  more  intelligent  and  ver- 


THE  CASE   OP    THE    FARMER.  I  19 

satile  stay  behind,  adapt  themselves  to  new  condi- 
tions, and  in  time  prosper  under  them.  The  least 
active  also  stay  behind,  and  flounder  hopelessly  in 
the  old  ways.  But  a  large  number  are  always  mov- 
ing west.  In  every  State  between  the  Alleghanies 
and  the  Missouri  River  there  are  large  tracts  formerly 
cultivated  by  native  settlers,  who  have  sold  their 
lands,  as  they  showed  signs  of  giving  out,  to  German 
or  Swedish  immigrants.  These  latter  have  not  in- 
frequently paid  good  prices  for  the  lands  ;  but  they 
have  been  bred  to  intensive  farming,  to  careful  and 
varied  use  of  the  soil,  and  they  have  prospered  where 
their  native  predecessors  have  been  unwilling  or 
unable  to  adapt  themselves  to  the  new  conditions. 
The  period  of  transition  is  a  hard  one  for  all  of  the 
native  farmers,  whether  they  stay  behind  or  move 
on,  and  the  lesson  of  using  the  soil  with  more  skill 
and  care  is  learned  only  under  the  pressure  of  neces- 
sity. In  such  periods  all  sorts  of  remedies  for  hard 
times  make  their  appearance  and  have  their  run.1 

1  Since  these  lines  were  written,  Dr.  T.  B.  Veblen  has  published,  in 
the  Chicago  your  mil  of  Political  Economy,  vol.  i.,  No.  1,  a  valuable 
paper  on  the  price  of  wheat  since  1867,  to  which  the  reader  is  referred 
for  an  investigation  of  the  recent  history  of  agriculture  in  the  United 
States. 


IV. 

The  Silver  and  Gold  as  Standards  of 

Value. 

The  simple  answer  to  those  who  propose  a  greater 
use  of  silver  as  money  has  been  given  in  the  preced- 
ing pages.  They  have  not  made  out  their  case 
against  the  existing  order  of  things.  There  are  no 
serious  evils  due  to  an  insufficient  supply  of  money. 
General  depression  does  not  exist.  Debtors  as  a  class 
are  suffering  no  hardships.  The  agricultural  depres- 
sion is  not  due  to  the  general  fall  in  prices,  but  to 
the  particular  mode  in  which  the  changes  in  the 
production  in  agricultural  commodities  have  been 
brought  about,  reinforced  in  the  United  States  by 
some  other  causes  in  no  way  connected  with  the  cur- 
iency  situation. 

These  negative  reasons  apply  to  the  arguments 
both  of  those  who  favor  international  bimetallism 
and  of  those  who  urge  the  independent  use  of  silver 
by  the  United  States.  When  we  consider  the  im- 
portance not  only  of  stability  in  the  medium  of 
exchange,  but  of  general  confidence  in  that  stability, 
the  negative  reasons  ought  to  suffice  for  rejecting  the 
proposals  of  the  silver  advocates.  But  there  are 
positive  reasons  in  addition. 

120 


SILVER   AND   GOLD  AS   STANDARDS  OF   VALUE.       121 

The  eventual  effect  of  a  silver  standard,  as  we 
have  seem,  must  be  to  cause  a  general  rise  in  prices. 
The  rise,  no  doubt,  would  not  be  immediate,  and  the 
change  not  so  prompt  or  its  effects  so  directly  felt 
as  is  generally  predicted.  But  come  it  would  ;  and 
the  phenomena  of  rising  prices  and  incomes  would  in 
due  time  appear.'  If  the  present  tendency  to  falling 
in  prices,  with  stationary  or  rising  money  incomes, 
which  are  the  characteristic  features  of  things  as 
they  are,  work  no  hardship  to  debtors,  the  contrary 
case  of  rising  prices  and  rising  money  incomes  must 
work  hardship  to  creditors.  No  doubt  that  hardship 
is  not  so  easily  seen  in  the  case  of  a  gradual  and 
uneven  rise  in  prices,  as  it  would  be  if  there  were  an 
immediate  jump  of  twenty  per  cent,  in  all  prices.  But 
it  is  none  the  less  real  and  serious.  With  money  in- 
comes rising  more  decidedly  and  rapidly  than  they 
have  been  rising  of  late  years,  debtors  would  find  it 
easier  to  discharge  their  obligations.  Creditors,  re- 
ceiving the  same  amount  of  money  as  they  had  given, 
would  find  the  purchasing  power  of  that  money 
lessened.  Not  only  would  they  be  debarred  from 
that  participation  in  the  improvements  in  produc- 
tion which  the  present  conditions  give  them,  but 
they  would  find  their  possessions,  in  terms  of  com- 
modities, cut  down  by  the  extent  of  the  general  rise 
in  prices. 

1  It  is  conceivable  that  the  rise  in  prices  might  be  counteracted  to 
some  extent  by  that  more  easy  and  abundant  production  of  com- 
modities which  now  causes  the  tendency  to  fall.  But  this  cause 
works  out  its  results  very  slowly, — more  slowly  than  the  silver 
issues  might  be  expected  to  work  out  their  effects  in  the  direction  of 
rising  prices. 


122  THE   ARGUMENT    FOR    SILVER. 

If  we  consider  now  not  only  the  effects  of  a  silver 
standard  on  the  relations  of  debtors  and  creditors  for 
the  time  being,  but  its  working  as  a  permanent 
measure,  after  the  period  of  transition  is  past,  we 
find  further  positive  reasons  against  its  adoption. 
These  lie  in  the  conditions  of  the  production  and  use 
of  silver  at  the  present  time.  It  would  carry  us  too 
far  to  enter  on  any  detailed  discussion  of  the  history 
and  prospects  of  the  production  of  silver;  the  salient 
and  important  facts  can  be  stated  in  a  few  words. 
The  total  production  of  silver  has  quadrupled  within 
the  last  three  decades,  and  more  than  doubled  within, 
the  last  two  decades  ;  and  in  the  five  or  ten  years  of 
the  immediate  past  there  have  been  no  signs  of  a 
relaxation  of  the  rate  of  increase.  The  following 
figures,  which  state  the  average  annual  production 
for  five-year  periods  from  185 1  to  1885,  and  the 
annual  production  in  each  year  since  1885,  tell  their 
own  story  '  : 

1  I  have  used  the  figures  of  Professor  Soetbeer,  as  given  in  his 
Materials  on  the  Silver  Question  and  continued  in  the  yahrbiicher 
fur  Nationahzkonmnie,  vol.  i.  (3d  series),  p.  561.  His  estimates  are 
slightly  larger  than  those  of  the  Director  of  the  United  States  Mint, 
who  puts  the  product  in  18S9  at  122.8  million  ounces  troy,  equal  to 
about  4,000,000  kilograms  ;  against  Soetbeer's  estimate  of  4,237,000 
kilograms  in  1889.  The  difference  arises  chiefly  because  Soetbeer 
puts  a  higher  estimate  than  the  Director  of  the  Mint  on  the  product 
of  the  minor  countries,  i.  e. ,  those  other  than  the  United  States  and 
Mexico.  As  to  the  rate  of  increase  in  the  total  product,  the  two 
authorities  agree. 

In  1891  there  was  another  marked  increase  over  1890.  The  Direc- 
tor of  the  Mint  estimated  the  world's  product  in  1890  at  134.4  million 
ounces  ;  in  1891  at  144  million  ounces. 

The  United  States  mine  about  two  fifths  of  the  total  product  of 


SILVER  AND   GOLD    \s   STANDARDS  OF    VALUE.      123 

The  average  annual  product  of  silver  in  1851-55  was      8S6  thousand  kilograms. 

"       "    1856-60    "         905 
"       "    1861-65    "      1,101  " 

"  1866-70  "  1,339 
"  "  1871-75  "  1,969 
"      "   1876-80   "     2,450         "  " 

"      "  1881-85    "     2,862         "  " 

The  product  in  the  year  1886  was 3, 021  " 

"     1887     " 3,324 

' 188S     " 3,673 

1     1889     " 4,237  " 

"     1890     " 4,600         " 

How  long  and  how  fast  this  extraordinary  increase 
will  continue,  it  is  impossible  to  say.  Geologists  are 
disposed  to  believe  that  it  will  not  continue  very 
long ;  but  for  recent  years  the  hard  facts  of  experi- 
ence are  against  them.  Certainly  the  indications  for 
the  immediate  future  point  to  a  further  increase  in 
the  total  amount  of  silver  mined. 

Meanwhile,  the  monetary  field  over  which  this 
growing  volume  of  silver  can  spread  is  very  limited. 
In  this  regard  there  is  a  vital  difference  between  the 
present  silver  situation  and  the  gold  situation  at  the 
time  of  the  great  gold  discoveries  of  1848-50.  From 
1850  to  i860  the  production  of  gold  increased  at  an 
unexampled  rate  ;  but  practically  all  the  mints  of  the 
civilized  world  were  then  open  to  it,  while  the  half- 
civilized  countries  also  absorbed  large  quantities. 
At  the  present  time  the  United  States  is  the  only 
civilized  country  which  coins  silver  except  as  a  sub- 
sidiary coin,  or  which  proposes  to  do  so.     The  coun- 

silver,  and  under  the  act  of  1890  buy  almost  exactly  the  same  amount. 
The  Director  of  the  Mint  estimates  the  silver  product  of  the  United 
States  in  1890  at  fifty-four  million  ounces,  exactly  the  amount  which 
the  Treasury  is  required  to  buy  each  year  under  the  present  law.  For 
1S91,  he  stated  the  product  to  be  58.3  million  ounces. 


124  THE   ARGUMENT   FOR   SILVER. 

tries  in  which  silver  is  freely  coined  are  India, 
Mexico,  Japan,  and  a  few  South  American  countries. 
The  field  for  the  use  of  silver  in  these  countries  is 
considerable  ;  but  it  is  at  least  doubtful  whether  they 
will  absorb  the  steadily  growing  product  at  existing 
prices.  The  United  States,  at  all  events,  is  the  one 
civilized  country  in  which  there  is  a  serious  proposal 
to  take  the  risks  which  lie  in  the  future  production 
and  value  of  silver,  and  to  rest  the  circulating  medium 
on  a  basis  so  narrow  and  unstable. 

On  the  other  hand,  gold  is  freely  coined,  and  is 
now  the  basis  of  the  medium  of  exchange,  in  all  civ- 
ilized countries.  The  wider  the  field  over  which  a 
given  medium  of  exchange  is  used,  the  less  likely  is 
it  that  changes  in  its  quantity  will  affect  its  value. 
The  wide  use  of  gold  among  the  countries  with  which 
our  commercial  relations  are  most  intimate  and  im- 
portant gives  a  guaranty  that  no  great  and  violent 
fluctuations  will  take  place  in  its  value,  or  in  the 
general  range  of  prices  which  in  the  long  run  is 
determined  by  its  value ;  a  guaranty  which  we 
should  certainly  not  have  if  the  United  States  alone 
were  to  use  silver. 

In  fact,  gold  performs  the  functions  of  a  measure 
of  value  and  of  a  standard  of  value  with  as  close  an 
approach  to  perfection  as  there  is  any  reasonable 
ground  for  expecting  from  any  monetary  system. 
Fluctuations  in  general  prices  no  doubt  take  place 
under  it ;  especially  the  fluctuations  due  to  the  varia- 
tions in  the  volume  of  credit  currency  outstanding, 
such  as  have  been  referred  to  frequently  in  the  pre- 
ceding pages.      But  these  are  inevitable  under  any 


SILVER  AND   GOLD  AS   STANDARDS   UF   VALUE.       125 

system  of  coinage  ;  and  they  are  certainly  mitigated 
in  their  effects  by  the  use  of  gold  as  a  basis,  since 
the  easy  flow  of  that  metal  from  country  to  country 
serves  to  correct  sooner  or  later  any  exceptional  rise 
or  fall  in  an  individual  country.  Over  long  periods 
of  time,  and  for  the  whole  civilized  world,  we  have 
had,  in  recent  years,  that  general  downward  move- 
ment of  prices,  connected  with  the  general  improve- 
ments in  production,  as  to  which  I  have  already 
stated  the  reasons  for  not  thinking  the  working  of 
the  gold  standard  to  give  grounds  for  serious  com- 
plaint. The  same  trend  of  events  may  be  expected 
as  far  in  the  future  as  we  can  make  any  sort  of 
prevision.  All  the  indications,  so  far  as  we  can  see, 
are  that  the  advance  in  the  arts  will  not  relax,  that 
commodities  will  be  produced  more  and  more  cheaply 
and  abundantly,  that  the  general  trend  of  prices  in 
civilized  countries  will  be  downward,  while  money 
incomes  will  continue  to  be  stationary  or  rising. 
The  present  monetary  situation,  and  that  for  the 
visible  future,  seem  to  be  on  the  whole  satisfactory. 
For  this  reason  the  schemes  proposed  by  various 
eminent  economists  for  a  tabular  or  multiple  stand- 
ard of  value,  do  not  seem  to  me  to  be  called  for  by 
any  serious  exigency  not  met  by  the  maintenance  of 
the  gold  standard ;  apart  from  the  fact  that  the 
habits  of  the  people,  and  the  difficulties  of  securing 
accurate  gauges  of  general  changes  in  prices,  make 
these  schemes  in  any  case  quite  impracticable.  The 
only  contingencies  with  which  the  gold  standard 
does  not  deal  to  reasonable  satisfaction  are  those 
that   may  arise  in  connection  with    contracts    run- 


126  THE   ARGUMENT   FOR   SILVER. 

ning  over  very  long  periods  of  time.  When  a 
government  incurs  a  huge  national  debt,  with  no  ex- 
pectation or  intention  of  paying  it  for  centuries  to 
come  ;  or  when  a  railway  company,  to  cite  a  recent 
case,  issues  bonds  payable  after  the  lapse  of  a  hun- 
dred years, — chances  are  taken  as  to  the  economic  de- 
velopments of  the  future  which  must  remain  chances 
whatever  the  way  in  which  the  contract  is  framed, 
whether  for  payment  in  gold,  or  silver,  or  grain,  or  by 
a  multiple  standard.  There  is  only  one  certain  way 
of  guarding  against  the  difficulties  that  may  arise 
from  such  contracts, — to  make  none  of  them. 

Lastly,  there  is  an  objection  to  a  change  to  a  silver 
standard,  or  to  any  proposal  of  the  sort,  less  tangible 
perhaps  than  those  stated  hitherto,  yet  more  import- 
ant and  fundamental.  It  is  an  objection  to  the  morale 
of  the  thing  ;  to  the  disposition  to  tinker  with  the 
currency  as  a  remedy  for  real  or  fancied  evils.  The 
present  agitation  in  the  United  States  for  the  use  of 
silver  is  not  the  result  of  those  considerations  which 
have  been  discussed  in  this  paper,  and  which  have 
moved  economists  of  eminence  to  advocate  bimetal- 
lism. The  reader  may  have  been  struck  by  the  fact 
that  the  reasoning  of  the  preceding  pages  touches 
only  a  small  part  of  the  ordinary  arguments  advanced 
in  this  country  by  the  silver  advocates.  Most  of 
their  arguments  are  for  an  increase  in  the  currency 
on  general  principles.  These  apply  in  favor  of  the 
issue  of  a  flood  of  paper  money  as  readily  as  they  do 
in  favor  of  the  silver  standard,  and  are  mingled  with 
schemes  that  can  have  no  respectable  backing,  like 
that  for  government  issues  on  the  pledge  of  grain  or 


SILVER   AND   GOLD   AS   STANDARDS  OF  VALUE.       \2J 

land.  Such  reasons  of  real  weight  as  may  be  ad- 
vanced in  favor  of  bimetallism  are  not  to  be  rejected 
merely  because  they  keep  bad  company.  But  the 
general  character  of  the  present  silver  agitation  is 
certainly  a  strong  argument  against  it.  It  is  born  of 
restlessness  and  ignorance.  Whenever  an  era  of  real 
or  apparent  depression  sets  in,  some  portion  of  the 
community  ascribes  it  to  a  single  cause — the  tariff, 
the  railways,  the  currency, — and  looks  for  great  things 
from  the  removal  of  that  one  cause.  The  most  com- 
mon panacea  is  the  increase  of  the  currency  ;  and  the 
silver  agitation  is  only  one  form  of  the  resort  to  this 
panacea.  No  lesson  just  now  is  more  important  for 
American  democracy  than  that  stability  is  the  first 
quality  needed  in  the  medium  of  exchange,  and  that 
only  harm  can  result  from  experimenting  with  it,  and 
looking  to  changes  in  it  for  the  cure  of  real  or  fancied 
evils. 


V. 

The  Expansion  of  the  Currency. 

In  conclusion,  we  may  take  up  the  question  of  the 
expansion  of  the  currency  of  the  United  States,  and 
the  mode  in  which  the  circulating  medium  may  best 
be  made  to  accommodate  itself  to  the  growing  wealth 
and  transactions  of  the  community.  So  far  as  the 
past  is  concerned,  the  evidence  is  ample  that  the 
circulating  medium  has  grown  regularly  and  steadily, 
and  has  not  left  the  people  of  the  United  States 
with  any  dearth  of  means  for  carrying  on  their  ex- 
changes. The  circulating  medium  of  a  country  like 
the  United  States  consists  of  two  different  kinds. 
The  one,  which  I  have  called  large  change,  serves 
for  every-day  retail  transactions  ;  the  other  carries 
on  the  larger  exchanges,  chiefly  of  wholesale  trade 
and  production.  We  have  seen,  in  the  first  part  of 
this  paper,  how  rapid  and  steady  has  been  the  in- 
crease in  the  supply  of  large  change.  Equally  rapid, 
and  even  more  striking,  has  been  the  increase  in  the 
medium  of  exchange  for  large  transactions.  That 
medium,  to  repeat  once  more,  is  to  be  found  in  bank 
deposits,  bank  checks,  and  bank  clearings.  The  vol- 
ume of  these  has  shown,  year  by  year,  a  steady  and 
rapid  increase.     Since  1878  the  volume  of  individual 

128 


THE    EXPANSION"    OF   THE    CURRENCY.  I  29 

deposits  in  national  banks  alone  has  more  than 
doubled,  rising  from  an  average  of  six  hundred  and 
fifteen  millions  in  1878  to  an  average  of  over  seven- 
teen hundred  millions  in  1892.1  An  increase  at  a 
rate  even  more  rapid  has  taken  place  in  the  deposits 
in  State  banks  and  trust  companies.  These  institu- 
tions, and  especially  the  trust  companies,  play  a  much 
more  important  part  in  the  mechanism  of  exchange 
now  than  they  did  in  1878  ;  and  their  deposits  in 
1892  amounted  to  over  a  thousand  millions.  The 
accurate  figures  which  we  are  so  fortunate  as  to 
possess  in  regard  to  the  operations  of  the  national 
banks  show  that  this  form  of  currency  has  accommo- 
dated itself  closely  to  the  growth  of  business  trans- 
actions :  rising  rapidly  from  1878  to  1882,  slacken- 
ing with  the  period  of  depression  which  was  marked 
by  the  panic  of  1884,  and  again  rising  regularly  in 
the  last  five  years.  This  part  of  the  circulating 
medium,  at   any  given  time  the  most  important  and 

1  The  individual  deposits  in  the  national  banks,  >>n  or  about  Octo- 
ber 1st,  have  been  as  follows  since  1S78  : 

1878 620.2  millions. 

1879 719-7  " 

1880 8735 

1881 1,071.0  " 

1882 1,122.5  " 

1883 1,049  -4  " 

1884 975.2 

1885 1. 102. 4 

1886 1, 1730          " 

1887 1,249  5          " 

1888 I-3SO-3          " 

•889 1.475-5 

1890 1, 521.7 

1891 1,588.3 

1892 J.753-3 

These  are  the  figures  as  to  the  national  banks  only  ;  to  which  must 
be  added  the  deposits  in  State  and  private  banks.  For  an  estimate  of 
the  growth  of  deposits  in  all  banking  institutions,  see  the  Quarterly 
Journal  of  Economics,  vol.  i,  p.  40S,  and  vol.  v,  p.  240. 


130  THE   ARGUMENT   FOR   SILVER. 

effective  in  the  whole,  will  grow  in  the  future  as  it 
has  grown  in  the  past  ;  and  in  this  direction  we  may 
be  sure  that  there  will  be  no  failure  of  the  medium 
of  exchange  to  grow  in  response  to  increasing  busi- 
ness transactions. 

As  a  basis  for  deposit  and  check  currency,  a  certain 
amount  of  cash  must  be  kept  in  bank  reserves. 
That  cash  in  European  countries  consists  mainly  of 
gold  ;  and  since  the  resumption  of  specie  payments,1 
it  has  been  made  up  very  largely  of  gold  in  the  banks 
of  the  United  States  also.  But  it  cannot  be  said 
that  the  world  finds  its  supply  of  gold  inadequate 
for  this  purpose.  A  comparatively  small  amount  of 
gold  suffices,  and  all  the  evidence  goes  to  show  that 
there  has  been  no  difficulty  in  securing  enough. 
The  holdings  of  gold  in  the  reservoirs  of  the  great 
banks,  so  far  from  declining,  have  shown  a  consider- 
able increase  ;  and  that  this  increase  has  not  been 
due  to  any  struggle  for  gold,  and  has  not  been  ac- 
companied by  any  disturbing  effects,  is  shown  by 
the  fact  that  the  rate  of  discount  has  not  been  high  % 
and  has  not  shown  any  unusual  fluctuations. 

So  far  as  that  other  part  of  the  currency  which  I 
have  called  large  change  is  concerned,  it  is  beyond 
question  that  the  direct  use  of  gold  coin  in  all  civil- 
ized countries,  or  even  in  the  United  States  alone, 
would  absorb  more  gold  than  the  annual  production 
could  easily  supply.  The  question  is,  what  form  of 
currency,  resting  on  a  gold  basis,  shall  be  used   to 

1  Or  rather,  since  the  great  inflow  of  gold  into  the  United  States 
in  the  years  1880-81,  which  was  the  main  cause  in  bringing  about 
the  large  holdings  of  gold  by  the  banks  of  the  United  States. 


THE   EXPANSION    OF   THE   CURRENCY.  13I 

supply  that  need?  Ideally,  the  best  currency  of 
this  sort  consists  of  bank-notes,  issued  under  condi- 
tions insuring  beyond  doubt  both  ultimate  payment 
and  immediate  redemption  in  specie.  This  form  of 
large  change  adapts  itself  most  readily  and  easily  to 
the  needs  of  the  community,  and  offers  least  oppor- 
tunity and  temptation  for  issue  to  excess.  But  for 
the  silver  issues  which  began  in  1878,  it  might  have 
been  expected,  when  once  the  resumption  of  specie 
payments  was  settled,  that  the  United  States  would 
look  to  the  national  banking  system  for  the  supply 
of  this  want  of  money.  As  at  present  issued,  how- 
ever, national  bank-notes  are  permitted  to  occupy 
the  field  only  in  small  part.  Whether  the  condi- 
tions of  their  issue  will  be  so  modified  as  to  permit  a 
renewed  growth  of  this  form  of  the  circulating  medi- 
um remains  to  be  seen.  The  suggestion  that  State- 
banks  be  again  permitted  to  issue  notes,  by  repeal- 
ing the  ten  per  cent,  tax  imposed  on  them  in  1865, 
brings  with  it  an  undeniable  danger  of  an  uncertain 
and  irredeemable  currency,  such  as  to  make  the  pro- 
posal in  its  bald  form  no  less  objectionable  than  the 
silver  legislation  of  1890.  But  undoubtedly  it  would 
be  possible  (assuming  that  no  insuperable  constitu- 
tional difficulties  stood  in  the  way)  to  frame  a  safe 
and  sound  system  of  issues  by  banks  incorporated 
in  the  States.  With  central  supervision  and  control, 
— which  must  necessarily  be  by  federal  authority, — 
and  with  provision  for  unfailing  redemption  of  the 
notes,  a  sound  currency  could  be  secured  respond 
ing  in  its  volume  to  the  growing  needs  of  the  com- 
munity.    Such  a  change  would  be  virtually  a  remod- 


132  THE   ARGUMENT   FOR   SILVER. 

elling  of  the  national  banking  system.  Eventually, 
it  may  be  hoped  that  the  United  States  will  leave  the 
path  of  direct  government  issues,  whether  paper  or 
silver,  and  will  put  the  provision  of  the  form  of  cur- 
rency which  its  paper  and  silver  have  supplied  into 
the  hands  of  banks,  under  a  system  enabling  them  at 
once  to  put  forth  an  unmistakably  sound  currency 
and  to  offer  their  services  to  industry  with  the  mini- 
mum of  restraint.  But  no  steps  in  this  direction  can 
be  hoped  for  until  the  questions  as  to  the  disposal 
of  the  government  currency  are  settled  ;  and,  among 
these,  first  of  all,  the  question  whether  that  currency, 
and  all  the  circulating  medium,  shall  rest  on  a  gold 
or  on  a  silver  basis. 


POSTSCRIPT. 

Since  the  preceding  pages  were  written,  events 
have  marched  fast.  The  act  of  1890  has  been  re- 
pealed. The  Treasury  in  consequence  has  had  to 
sustain,  not  a  constantly  increasing  volume  of  silver 
currency,  but  a  stationary  mass.  Nevertheless,  the 
crisis  of  1 893  and  its  after-effects  have  made  its  task- 
in  almost  every  way  more  difficult  than  it  had  ever 
been  before,  and  its  operations  more  instructive  as 
to  the  dangers  and  anomalies  to  which  the  currency 
legislation  of  the  past  has  led.  At  the  same  time, 
the  demand  for  the  free  coinage  of  silver  has  been 
raised  more  loudly  and  insistently  than  ever,  and 
has  become  the  issue  of  a  national  campaign. 

The  time  is  not  ripe  for  a  detailed  account  of  the 
experiences  of  the  last  three  years ;  still  less  for  any 
attempt  to  state  the  probable  ultimate  outcome. 
But  it  will  be  convenient  to  narrate  briefly  the 
salient  events  to  the  present  date,1  and  to  point  out 
some  further  lessons,  even  though  of  a  sort  very 
similar  to  those  of  earlier  years,  from  the  troubles  of 
the  immediate  past. 

It  has  been  seen  ~  that  in  the  years  1891  and  1892 
there  was  activity  and  prosperity,  due  mainly  to  the 

1  Midsummer  of  1896.  -  See  pp.  67,  68. 

133 


134  POSTSCRIPT. 

unusually  heavy  foreign  demand  for  agricultural 
staples.  The  conditions  for  the  moment  were  favor- 
able to  the  absorption  and  use  of  the  large  currency 
issues  of  the  act  of  1890.  But  with  the  close  of  1892 
a  distinct  chill  was  felt  in  the  industrial  world.  Im- 
ports had  increased,  while  exports  declined  somewhat. 
There  was  a  considerable  outflow  of  gold  in  1892; 
and  in  the  early  part  of  1893  that  outflow  continued, 
and  assumed  very  large  proportions.  The  adverse 
balance  of  international  payments,  indicated  by  this 
movement,  was  due  partly  to  causes  of  every-day 
operation,  partly  to  a  large  flow  of  railway  securities 
from  Europe,  and  especially  from  London,  to  the 
United  States.  This  sale  of  American  securities 
was  in  turn  the  result  of  mixed  causes:  depression 
in  Europe,  distrust  of  American  railway  manage- 
ment, fear  of  a  suspension  of  gold  payments  in 
the  United  States.  At  all  events,  heavy  payments 
had  to  be  made  abroad  on  American  account  ;  and 
in  the  first  five  months  of  1893  the  exports  of  gold 
were  nearly  sixty  millions  of  dollars. 

The  drain  of  gold  now  fell  directly  on  the  Treasury. 
This  is  one  striking  new  feature  in  the  currency  situ- 
ation of  recent  years.  Before  1 890  an  outflow  of 
gold  did  not  necessarily  or  indeed  usually  fall  on  the 
Treasury.  What  gold  had  been  needed  for  export 
was  readily  furnished  by  the  banks  from  their  own 
supplies.  There  was  general  confidence  that  the 
Treasury  would  redeem  legal-tenders  without  fail  in 
gold  ;  and  hence  no  disposition  to  hold  the  specie 
itself  rather  than  the  right  to  it.  After  1890,  and 
especially  after  1892,  all  this  was  changed.     The  new 


POSTSCRIPT.  135 

and  enlarged  silver  issues  had  shaken  general  confi- 
dence. The  use  of  legal-tenders  in  place  of  gold,  in 
payments  by  the  Treasury  to  the  New  York  banks, 
was  daily  proof  to  the  financial  world  that  the  gov- 
ernment's gold  resources  were  strained  '  ;  and  there 
was  the  ominous  decline  in  the  gold  reserve.  The 
banks  no  longer  furnished  gold  to  any  one  who 
asked  for  it.  They  furnished  United  States  notes 
of  the  old  issue,  or  Treasury  notes  of  1890,  which 
could  be  exchanged  for  gold  over  the  government's 
counters.  This  has  come  to  be  the  established  situ- 
ation. 

Every  export  drain  for  gold  falls  mainly  on  the 
Treasury,  and  reduces  the  gold  reserve.'  The  banks, 
and  especially  the  New  York  banks,  have  not  indeed 
failed  to  show  public  spirit  in  coming  to  the  aid  of 
the  government  in  its  difficult  task  of  maintaining 
gold  payments.  They  have  at  various  times  supplied 
gold  either  by  the  purchase  of  bonds,  or — what  showed 

1  Since  1892,  practically  no  gold  has  been  paid  out  by  the  Sub- 
Treasury  at  New  York  in  its  settlements  with  the  clearing-house 
banks.  In  1893,  during  the  height  of  the  panic,  some  gold  coin  was 
paid  out,  because  of  the  temporary  receipts  of  gold  coin  for  customs 
at  that  time  to  which  reference  is  made  below.  But  this  was  an  ex- 
ception. During  the  whole  fiscal  year  1894-95  the  New  York  Sub- 
Treasury  settled  its  balances  entirely  in  legal  tenders.  See  the 
Report  of  the  Tt-easurer  for  1S95,  p.  118. — Compare  p.  60,  above, 
where  the  beginnings  of  thi3  process  are  noted. 

2  In  1893  a  part  of  the  gold  exported  still  came  from  the  supplies 
in  the  banks,  and  occasional  amounts  have  come  from  the  same  source 
in  later  years.  But  in  the  main,  the  Treasury  has  had  to  supply  the 
gold  demanded  for  export  ;  and  this  more  and  more  exclusively  as 
time  went  on,  and  as  confidence  in  its  stability  was  shaken  more  and 
more. 


136  POSTSCRIPT. 

more  clearly  an  unselfish  motive — by  the  deposit  of 
gold  at  the  Treasury  in  exchange  for  legal-tender 
notes.  But  operations  of  this  sort,  helpful  though 
they  may  be  for  tiding  over  some  temporary  exi- 
gency, are  a  poor  substitute  for  real  strength  in  the 
Treasury,  and  for  real  confidence  by  the  community 
in  the  solidity  of  the  circulating  medium. 

The  gold  stock  of  the  Treasury  consequently  de- 
clined. At  the  close  of  1892  it  had  amounted  to 
over  one  hundred  and  twenty  millions.  In  April  of 
1893  it  fell,  for  the  first  time  since  the  resumption 
of  specie  payments,  below  the  traditional  "  reserve  " 
of  one  hundred  millions.  The  government  made 
strenuous  efforts  to  preserve  its  holdings  by  ex- 
changes of  paper  for  gold  with  banks  in  different 
parts  of  the  country.  But  the  spell  had  been  broken. 
No  measures  could  restore  the  Treasury  to  that 
position  of  real  strength  and  unquestioned  prestige 
which  should  belong  to  the  institution  that  holds 
the  final  specie  reserve  of  the  country.  Since  1893, 
the  Treasury  has  been  almost  regularly  a  suppliant. 
It  has  borrowed,  and  arranged,  and  transferred,  and 
resorted  to  every  device  which  might  give  aid  for 
the  moment.  It  has  never  been  strong  and  inde- 
pendent ;  and  it  has  several  times  come  close  to 
virtual  bankruptcy.  The  policy  of  compromise,  of 
taking  chances  with  risky  experiments,  which  had 
been  followed  in  the  legislation  of  1878  and  1890, 
met  at  last  the  reward  it  deserved. 

The  great  crisis  of  1893  was  in  good  part  the 
result  of  the  shock  to  general  confidence  which  thus 
ensued.     It  was  naturally  held  up  by  the  opponents 


POSTSCRIPT.  137 

of  the  silver  issues  as  mainly  an  object  lesson  in  the 
effects  of  the  silver  policy.  To  the  careful  student  of 
that  policy  it  proved  quite  as  instructive  in  its  after- 
effects as  in  its  immediate  causes  and  in  its  course. 

Uneasiness  prevailed  in  the  spring  of  1893,  and 
became  greater  and  greater  as  gold  exports  con- 
tinued and  the  Treasury  reserve  sank.  There  were 
heavy  failures,  of  banks  as  well  as  of  mercantile 
houses  ;  and  in  June  runs  on  banks  began  in  several 
parts  of  the  country.  By  July  the  well-defined  phe- 
nomena of  an  acute  commercial  crisis  appeared,  and 
during  that  month  and  August  were  seen  on  a 
scale  and  with  an  intensity  never  surpassed.  The 
cash  reserves  of  banks  were  depleted  ;  no  business 
concern  knew  whether  its  debtors  would  meet  en- 
gagements, and  whether  in  turn  it  could  find  funds 
to  meet  accruing  obligations  ;  loans  were  in  feverish 
demand,  and  interest  rates  high  almost  to  the  point 
of  prohibition  ;  the  banks  themselves  were  sus- 
pected.— some  more,  some  less,  some  with  reason, 
some  without  reason, — of  impending  failure;  actual 
cash  was  wanted  by  every  one.  Notwithstanding  a 
resort,  in  practically  all  the  larger  cities  of  the  coun- 
try, to  clearing-house  certificates  as  a  means  of  set- 
tling balances  between  banks,  a  partial  suspension 
of  payments  over  the  counter  took  place  ;  almost 
everywhere  cash  was  for  some  weeks  at  a  premium 
as  compared  with  certified  checks  on  unquestionably 
solvent  banks.  Failures  followed  failures, — of  mer- 
cantile houses,  of  great  corporations,  of  long-estab- 
lished banks. 

How  far  the  crisis  was  due  to  the  silver  legislation, 


138  POSTSCRIPT. 

how  far  to  other  causes,  must  remain  impossible  of 
satisfactory  proof.  Beyond  question,  the  general 
uneasiness  as  to  the  currency  situation  and  its  out- 
come was  the  prime  occasion  of  the  crisis.  Equally 
beyond  question,  the  crisis  in  its  course  became  a 
panic,  in  the  literal  sense  of  the  word  :  an  unreason- 
ing sanvc  qui  pent,  which  brought  to  the  ground  many 
business  ventures  that  in  times  of  calm  and  order 
would  have  held  their  own  without  difficulty.  When 
fairly  in  progress,  the  panic  naturally  caused  the 
overt  failure  of  many  establishments  which,  though 
in  fact  in  a  state  of  insolvency,  might  have  been 
able,  under  ordinary  financial  conditions,  to  run 
along  for  some  time,  and  indeed,  by  good  luck  or 
good  management,  might  in  the  end  have  extricated 

o  0*0 

themselves  entirely  from  danger.  While  many  of  the 
failures  of  1S93  were  temporal}-  suspensions  of  sol- 
vent banks  and  firms,  due  simply  to  the  stress  of  the 
panic,  many  were  real  failures,  due  to  inherent  weak- 
ness. The  more  numerous  and  wide-reaching  the 
industrial  break-downs  of  this  latter  sort,  the  more 
probable  was  it  that  the  crisis  of  1893,  while  occa- 
sioned by  the  silver  danger,  was  due  also  to  the 
deeper  causes  which  have  brought  about,  in  all  coun- 
tries throughout  our  century,  an  almost  regular 
succession  of  these  economic  storms.  It  is  true  that 
the  years  immediately  preceding  1893,  while  they 
had  been  years  of  activity,  had  not  shown  the  fever- 
ish speculation  which  commonly  precedes  the  storm. 
Yet  in  some  parts  of  the  West,  notably  in  Colorado, 
there  had  been  wild  gambling  in  land  ;  and,  what 
was  probably  more  important,  there   had    been,  in 


POSTSCRIPT.  139 

the  preceding  years,  from  1886  to  1890,  a  great  deal 
of  reckless  investment  in  railways  and  in  iron-making 
industries.  Certainly  some  great  railway  corpora- 
tions had  been  living  from  hand  to  mouth  for  several 
years  before  1893,  borrowing  heavily  on  short  time, 
hoping  for  a  turn  in  their  favor,  helped  for  a  while 
by  the  favorable  conditions  of  1891  and  1892,  and 
finally  brought  to  bankruptcy  by  the  panic.  Other 
large  corporations  and  firms  undoubtedly  had  a 
similar  experience  ;  so  that  the  crisis  of  1893  had 
not  merely  the  immediate  effects  of  a  momentary 
financial  pinch  of  great  severity,  but,  in  no  small  de- 
gree, the  larger  and  longer  effects  of  an  industrial 
crisis  leading  to  prolonged  liquidation  and  substan- 
tial readjustment  of  the  community's  productive 
forces. 

One  effect  of  the  crisis  was  prompt  and  clear.  It 
led  to  the  repeal  of  the  act  of  1890.  President 
Cleveland,  at  the  close  of  June,  called  an  extra  ses- 
sion of  Congress,  to  meet  in  early  August.  Through 
the  influence  and  prestige  of  the  administration,  the 
unconditional  repeal  of  the  silver  purchase  act  was 
brought  about.  In  the  House  the  vote  for  it  was 
reached  within  two  weeks  after  the  session  began. 
In  the  Senate  the  struggle  was  bitter,  and  lasted 
over  two  months.  The  repeal  bill  there  was  not 
carried  until  the  close  of  October  ;  and  it  did  not 
become  law  until  the  2d  of  November, — some  weeks 
after  the  panic  had  subsided.  All  the  influence  of 
the  administration,  all  the  strength  of  public  opin- 
ion, all  the  pressure  from  the  crisis,  were  required  to 
bring  about  the  repeal.     It  was  not    accomplished 


I40  POSTSCRIPT. 

without  shattering  the  cohesion  of  the  Democratic 
party,  then  fresh  from  its  victory  in  the  election  of 
1892  ;  and  it  prepared  the  way  for  that  breach  in  the 
party  which  took  place  so  dramatically  in  1896. 

The  repeal  of  the  silver  purchase  act  put  an  end  to 
the  issues  of  1890;  and  that  act  itself  had  put  an 
end  to  the  issues  of  1878.  The  result  was  that  the 
currency  of  the  United  States  was  left  in  a  position 
of  almost  complete  rigidity.  The  United  States 
notes,  or  old  legal  tenders,  stood  at  the  precise 
amount  '  at  which  Congress  had  left  them  in  1878. 
All  three  were  fixed  in  amount  ;  the  quantity  in  cir- 
culation was  subject  to  reduction  only  by  the  possi- 
bility of  their  being  hoarded  in  the  Treasury, — a 
process  which,  to  be  sure,  was  resorted  to  after  a 
while  on  no  small  scale.  The  national  bank-notes 
might  indeed  contract  or  enlarge  somewhat  ;  but 
under  the  conditions  as  to  the  purchase  of  bonds,  no 
real  elasticity  could  appear  as  to  them.  The  volume 
of  the  whole  mass  of  the  paper  and  silver  money 
was  so  settled  as  to  be  in  no  way  responsive  to  the 
varying  demands  of  the  community  for  its  use  in 
circulation. 

One  change,  indeed,  took  place  after  1893  which 
affected  in  some  small  degree  the  composition, 
though  not  the  volume,  of  the  silver  currency.  A 
certain  quantity  of  the  Treasury  notes  of  1890  was 
transformed  into  silver  certificates.     This  was  the  re- 

1  In  May,  1878,  Congress  forbade  the  further  retirement  of  United 
States  notes,  and  enacted  that  any  notes  received  or  redeemed  by  the 
Treasury  should  not  be  destroyed,  but  reissued.  The  volume  then 
outstanding  was  346,681,016. 


POSTSCRIPT.  141 

suit  of  a  provision  in  the  act  of  1890  which  probably 

was  not  expected  to  bring  about  any  such  transfor- 
mation.' That  act  made  the  new  notes  payable  in  gold 
or  in  silver  coin,  at  the  government's  option  ;  it  re- 
quired also  that  no  greater  or  less  amount  of  such 
notes  should  be  outstanding  than  the  silver  bullion 
or  coin  "  then  held  in  the  Treasury  "  against  them. 
The  government  has  always  redeemed  them  in  gold, 
when  desired.  So  redeemed,  they  cannot  be  de- 
stroyed, but  must  be  either  reissued  or  hoarded  as 
Treasury  cash  ;  since  redemption  in  gold  does  not 
affect  the  silver  held  in  the  Treasury  against  them, 
which  determines  the  volume  that  must  be  outstand- 
ing. But  it  may  happen  that  redemption  of  the 
notes  in  silver  dollars  or  certificates  is  asked,  either 
because  some  one  wishes  to  take  advantage  of  the 
government's  offer  to  transfer  silver  dollars  free,  or 
because  silver  certificates  of  small  denominations 
are  wanted.  When  so  redeemed,  the  silver  dollars 
"  then  held  in  the  Treasury  "  specifically  against  the 
notes,  become  less.  The  notes  redeemed  in  silver 
are  destroyed  once  for  all,  their  place  in  circulation 
being  taken  by  silver  dollars  and  certificates.  Prac- 
tically, the  place  is  filled  by  silver  certificates,  for  the 
quantity  of  silver  dollars  in  use  shows  no  tendency 
to  grow  beyond  the  sum  (35  or  60  millions),  which 
it  reached  as  early  as  1886.2  The  net  result  of  this 
curious  transformation  is  that  the  amount  of  Treas- 

1  The  act  of  1890  was  not  repealed  in  toto  in  1S93.  Only  those 
parts  were  repealed  which  directed  the  purchase  of  silver  and  the 
issue  of  Treasury  notes.     The  rest  remained  in  force. 

2  See  above,  pp.  15,  16,  45. 


I_p  POSTSCRIPT. 

ury  notes  of  1 890  is  slowly  but  steadily  declining, 
and  that  the  paper  which  the  government  may  be 
called  on  to  redeem  on  presentation  in  gold  is  be- 
coming less  by  so  much.  The  total  issue  of  Treas- 
ury notes  under  the  act  of  1890  was  nearly  $1  56,000.- 
OOO.  Some  slight  redemption  in  silver  took  place 
almost  at  once  ;  and  by  June  1,  1896,  this  process 
had  been  carried  so  far  that  the  amount  of  notes 
outstanding  had  fallen,  in  round  numbers,  to  $131,- 
000,00.  The  change  is  (as  yet)  not  quantitatively  of 
great  importance,  and  it  serves  chiefly  to  illustrate 
the  anomalies  of  the  situation  as  it  has  developed 
under  the  haphazard  legislation  of  the  last  gener- 
ation. 

We  may  proceed  now  to  consider  the  course  of 
events  after  the  crisis  of  1893,  and  the  repeal  of  the 
silver  purchase  act. 

During  the  crisis  itself,  in  the  summer  of  1893,  the 
Treasury  suffered  little  ;  indeed,  it  was  able  to  in- 
crease its  gold  holdings.  So  great  was  then  the 
demand  for  cash,  that  large  quantities  of  gold  were 
imported  from  Europe.  At  the  same  time,  the  fact 
that  the  community  was  little  used  to  gold  in  every- 
day payments,  caused  all  forms  of  paper  money  to 
be  especially  prized.  "  Currency  "  of  any  sort  being 
in  demand  by  banks  and  individuals,  gold  was  used 
in  payments  to  the  Treasury.  The  curious  phe- 
nomenon thus  appeared  that  in  the  height  of  the 
crisis  which  the  fear  of  the  suspension  of  gold  pay- 
ments had  occasioned,  the  Treasury  took  in  a  larger 
proportion  of  gold  coin  than  for  many  years.  During 
August  and  September,  one-half  of  the  customs  pay- 


POSTSCRIPT.  143 

merits  in  New  York  were  made  in  gold  coin.1  But 
this  was  a  phenomenon  of  very  short  duration.  The 
panic  died  down,  having  run  its  course  like  a  fever. 
Lethargy  succeeded.  Cash,  so  eagerly  demanded  in 
August  and  September,  became  superabundant  in 
October  and  November.  The  receipts  of  gold  coin 
ceased  :  the  Treasury  once  more,  and  now  defini- 
tively, received  only  legal-tenders  of  the  old  and 
new  issues,  and  silver  certificates.  What  was  much 
more  serious,  the  Treasury  had  to  face  those  condi- 
tions of  severe  and  prolonged  business  depression 
which  inevitably  follow  an  acute  crisis. 

Several  factors  have  borne  on  the  operations  of 
the  Treasury  during  the  period  of  depression  which 
began  with  the  autumn  of  1893.  Some  have  been 
made  much  of  in  popular  discussion,  others  have 
failed  to  receive  the  attention  they  deserve.  Their 
efforts  are  inextricably  intermingled  ;  yet,  for  clearer 
understanding  of  the  situation,  they  should  be  con- 
sidered one  by  one. 

First,  and  not  sufficiently  attended  to  in  current 
discussion,  is  the  redundancy  of  the  currency, — the 
existence  of  more  cash  than  the  transactions  of  the 
community  call  for.  The  experience  of  1884-85,  as 
narrated  in  the  preceding  pages,"  has  been  repeated, 
but   under   more   unfavorable   conditions    and    with 

1  They  were  made  in  gold  coin,  not  in  gold  certificates.  From 
1882  (when  the  issue  of  gold  certificates  was  again  authorized)  to  1892, 
the  Treasury  gold  receipts  had  come  almost  exclusively  in  the  form  of 
gold  certificates.  These  practically  ceased  to  appear  in  the  New  York 
customs  receipts  since  the  early  part  of  1892,  nor  have  they  appeared 
at  any  time  since  that  date. 

'2  See  above,  pp.  25-37. 


144  POSTSCRIPT. 

more  unfortunate  results.  The  decline  in  business 
activity  brought  with  it  inevitably  and  easily  a  de- 
cline in  bank  deposits.  Under  any  monetary  system, 
this  must  have  brought  with  it  an  accumulation 
of  cash  in  bank  vaults,  and  a  heavy  surplus  re- 
serve. Under  the  top-heavy  and  inelastic  mone- 
tary system,  or  lack  of  system,  which  the  United 
States  had  patched  up,  the  accumulation  took  place 
on  an  enormous  and  unmanageable  scale.  Even 
though  no  longer  increasing  in  volume,  the  paper 
currency  of  the  community  became  excessive  for  the 
diminished  transactions;  and  it  flowed  back  to  the 
financial  centres.  Silver  certificates,  it  is  true,  whose 
volume  had  ceased  to  grow  (with  the  exception  just 
noticed)  since  1890,  continued  in  the  main  to  be  in 
active  use  for  large  change.  But  legal-tenders  heaped 
up  in  the  financial  centres,  and  especially  in  New 
York.1  The  surplus  reserve  in  the  metropolis 
reached  unexampled  figures.  The  legal-tenders 
amounted  for  months  at  a  time  to  more  than  one 
hundred  millions.  A  chronic  plethora  of  money  set 
in  at  New  York.     A  great  further  store  of  cash  was 

1  No  distinction  appeared  between  the  old  United  States  notes, 
or  greenbacks,  and  the  new  Treasury  notes  of  1890.  In  the  first  year 
or  two  after  the  issue  of  the  new  notes,  there  had  been  some  disposi- 
tion in  financial  circles  to  distinguish  between  the  Treasury  notes  and 
the  old  legal-tenders,  from  a  fear  that  the  Treasury  might  maintain 
gold  payments  more  unswervingly  for  the  old  issues  than  for  the  new. 
But  as  it  appeared  that  the  administration  was  equally  steadfast  for 
the  maintenance  at  gold  of  all  the  government  promises  to  pay,  the 
legal-tenders  of  either  issue,  identical  as  they  were  in  their  standing  at 
law,  became  one  homogeneous  mass  in  their  economic  aspects.  Com- 
pare what  was  said  at  pp.  79,  80,  above. 


POSTSCRIPT.  145 

hoarded  and  put  away  at  the  same  time,  as  will  pres- 
ently be  seen,  in  the  vaults  of  the  government.  Be- 
yond question,  under  the  conditions  of  depression 
which  set  in  after  1893,  the  accumulated  mass  of 
paper  and  silver  money  was  redundant. 

In  this  situation,  the  national  bank-note  circulation 
remained  little  changed  :  indeed,  it  rose  somewhat.1 
During  the  crisis  of  1893,  some  banks  had  bought 
bonds  and  prepared  for  an  increase  of  circulation,  in 
order  to  get  more  of  the  ready  cash  so  greatly  in 
demand  during  the  monetary  pinch.  So  much  time 
was  required  for  preparing  and  printing  the  notes 
that  this  resource  was  of  little  avail  for  its  immediate 
object.  It  became  effective  after  an  interval  so  long 
that  it  served  mainly  to  increase  the  cash  in  circula- 
tion when  it  had  already  become  excessive.  Some 
further  increase  took  place  afterwards,  in  conse- 
quence of  the  later  issues  of  government  bonds  and 
the  possibility  of  profit  from  their  lower  price.  The 
changes  were  not  of  great  moment,  and  served 
chiefly  to  show  how  inelastic  and  unresponsive  to 
the  needs  of  the  community  was  the  process  of 
bank-notes  issue  under  the  bank-deposit  system. 
The  obvious  and  important  change  from  the  situa- 
tion as  it  stood  before  1890,  was  that  the  bank-note 
circulation   was   no   longer  declining,  and    no  longer 

1  In  continuation  of  the  figures  given  on  page  40,  note,  the  bank- 
note circulation  is  here  stated  for  recent  years  : 

Gross.  Net. 

(Total  outstanding.)  (Less  lawful  money  on 

deposit.) 

October  31,  18Q3 209.3  188.0 

"        31,  1894 207.6  179.4 

"        31,1895 2<3-9  190.2 


146  POSTSCRIPT. 

making    way    for    the    government    issues  :    leaving 
these  to  produce  their  full  and  unmitigated  effects. 

The  redundancy  of  the  currency  promoted  gold 
exports, — the  next  factor  among  those  which  affected 
the  Treasury.  These  took  place  almost  steadily,  and 
carried  out  of  the  country  much  more  gold  than  was 
added  to  its  stock  by  the  mines.  During  1893,  it  is 
true,  the  heavy  imports  of  the  panic  period  overcame 
the  outflowing  tide  for  a  space  ;  but  the  gold  then 
brought  in  soon  went  out  again,  and  was  followed 
by  more  and  more.1  Just  how  or  why  this  outflow 
set  in  is  not  so  easy  to  state.  It  was  promoted,  as 
has  just  been  said,  by  the  redundancy  of  the  cur- 
rency. But  it  was  not  brought  about  through  the 
process  which  is  usually  associated  with  excessive 
currency  issues, — higher  prices,  larger  imports,  and 
then  an  outflow  of  specie.  There  were  no  higher 
prices  or  larger  imports.  The  impotence  of  a  plenty 
of  cash  to  affect  prices  with  any  sureness  or  prompt- 
ness in  credit-using  communities,  was  never  more 
strikingly  illustrated  than  in  the  United  States 
during  1894  and  1895.  The  plenty  of  cash  un- 
doubtedly had  some  effect  in  promoting  the  outflow 
of  gold,  by  making  loanable  funds  abundant  and 
cheap  in  New  York,  and  so  enabling  specie  to  be  with- 
drawn thence  without  any  check  from  a  rise  in  the 
rate  of  discount.     But  the  exports  were  due  directly 

1  The  net  exports  of  geld  during  the  calendar  years  are  stated  thus 
in  the  Treasury  statistics  : 

1892,  59.1  millions. 

1893,  7.0   " 

1894,  81.2 

1895,  72.1 


P(  »STS<  RIPT.  147 

to  other  causes  ;  probably  in  the  main  to  further 
sales  of  American  securities  by  uneasy  European  in- 
vestors. Other  causes, — such  as  the  large  remittances 
for  American  travellers  abroad, — also  affected  the 
balance  of  international  payments.  At  all  events, 
the  balance  was  such  that  specie  had  to  be  remitted. 
That  specie,  as  we  have  seen,  was  called  for  from  the 
Treasury  stock  ;  so  that  the  government  had  to  face 
both  an  unwieldy  and  excessive  mass  of  promises  to 
pay  gold  on  demand,  and  a  heavy  foreign  drain  on 
its  stock  of  the  metal. 

These  conditions  were  embarrassing  enough  ;  but 
to  them  was  added  another  source  of  embarrass- 
ment,— a  declining  and  deficient  revenue. 

Under  any  rational  or  deliberate  system,  the  acci- 
dent of  a  surplus  or  deficit  in  the  public  revenues 
would  not  be  of  special  importance  for  the  stabilit3* 
of  the  monetary  system.  But  the  Treasury  of  the 
United  States  has  such  duties  and  obligations  that 
the  functions  as  custodian  of  the  tax  receipts,  dis- 
burser  of  the  payments,  and  holder  of  the  main 
specie  reserve  for  the  circulating  medium,  are  inex- 
tricably bound  together.  No  special  fund  of  gold  is 
set  aside  for  the  redemption  of  its  five  hundred 
millions  of  demand  promises  to  pay,  nor  is  there  any 
systematic  provision  for  replenishing  its  stock  when 
drained  by  ordinary  payments.  This  situation  is  the 
effect  of  a  long  series  of  measures,  no  one  of  which 
looked  to  such  an  outcome.  The  establishment  of 
the  Independent  Treasury  in  1846  was  designed  to 
divorce  the  government  completely  from  banks  and 
paper  currency.     Then  came  the  legal-tender  issues 


148  POSTSCRIPT. 

of  the  Civil  War,  regarded  at  the  time  as  a  tempo- 
rary resource,  but,  as  it  proved,  of  long  duration  and 
unexpected  effect.  Resumption  was  undertaken  in 
1875,  and  the  notes,  formerly  inconvertible,  became 
redeemable  in  specie  after  1879;  Dut  before  resump- 
tion was  accomplished  it  was  provided,  in  1878,  that 
even  when  redeemed  they  should  remain  in  use  as 
permanent  government  paper.  The  silver  legislation 
of  1878  and  1 890  then  added  to  the  mass  of  currency 
which  the  Treasury  was  called  on  to  sustain.  That 
Treasury,  nevertheless,  was  still  organized  on  the 
basis  of  its  simple  functions  of  1846;  exposed  to 
fluctuations  in  its  resources  from  changes  in  the  rev- 
enue and  expenditures,  and  provided  with  no  sepa- 
rate funds  for  its  task  of  upholding  a  huge  quantity 
of  paper  money. 

The  anomalies  and  dangers  of  the  situation  were 
concealed  for  a  long  series  of  years,  from  1879  to 
1890,  by  the  accident  of  a  large  surplus  revenue. 
Less  fortunate  conditions  were  bound  to  come 
sooner  or  later  ;  and,  as  it  happened,  when  they  did 
come,  they  were  as  severely  unfavorable  as  the 
earlier  conditions  had  been  in  high  degree  favorable. 
At  the  same  time  that  the  silver  act  of  1890  added 
to  the  Treasury's  obligations,  the  McKinley  tariff 
act  of  1890  made  a  heavy  cut  in  the  revenue  by 
abolishing  the  duty  on  imported  sugar,  while  adding 
to  the  expenditures  by  a  bounty  on  domestic  sugar. 
Even  though  the  repeal  of  the  sugar  duty  did  not 
take  effect  till  near  the  beginning  of  the  fiscal  year 
1891-92,  and  though  the  business  activity  of  the 
time   caused    heavy    imports    and    larger    customs 


POSTSCRIPT.  149 

revenue,  the  administration  of  President  Harrison 
met  serious  embarrassment  during  its  last  year,  and 
during  its  last  months  lived  simply  from  hand  to 
mouth.  Nothing  ever  happened  more  lucky  for  the 
Republican  party  than  its  defeat  in  1892,  and  its 
fall  from  power  and  from  obvious  responsibility  in 
1893.  The  incoming  administration  of  President 
Cleveland  found  a  depleted  Treasury.  Then  came 
the  crash  of  1893  ;  imports  fell,  and  the  customs 
revenue  with  them.  The  Treasury  was  called  on  to 
meet  a  foreign  drain  of  gold,  and  at  the  same  time 
its  ordinary  payments  exceeded  its  tax  receipts. 
Some  attempt  was  made  later  to  remedy  the  fiscal 
situation  by  the  tariff  act  of  1894.  That  measure, 
though  by  no  means  so  vigorous  in  its  provision  for 
fiscal  needs  as  the  situation  demanded,  would  prob- 
ably have  produced  a  revenue  equal  to  the  expendi- 
tures had  it  not  been  for  the  continuing  depression, 
and  the  consequent  scantiness  of  the  customs  and 
other  receipts.  As  it  was,  several  years  of  deficit 
succeeded  each  other.  For  the  fiscal  year  1894,  the 
excess  of  expenditures  over  ordinary  receipts  was 
seventy  millions;  for  1895,  it  was  forty-three  mil- 
lions;  for  1896,  it  was  twenty-six  millions. 

With  an  insufficient  revenue  ;  with  a  redundant  and 
unmanageable  mass  of  paper  money  accumulating  in 
financial  centres;  with  a  drain  for  gold  from  abroad — 
with  all  this,  it  was  natural  that  at  one  time  and 
another  legal-tender  notes  should  be  presented  at  the 
Treasury  for  redemption,  even  when  gold  was  not 
wanted  for  export.  A  run  of  this  sort  was  a  simple 
result  of  the  complete  shattering  of  the  Treasury's 


I50  POSTSCRIPT. 

former  strong  condition.  The  surprising  thing  was 
that  runs  were  so  scarce  and  slight.  At  one  time,  in 
January  and  February  of  1895,  there  was  indeed  a 
serious  run  ; '  some  forty-three  millions  of  gold  were 
withdrawn  for  domestic  hoarding,  and  the  Treasury 
stock  was  reduced  to  forty-one  millions.  But,  in  the 
main,  the  forbearance  of  the  business  and  financial 
community  has  been  remarkable.  Banks  and  other 
holders  of  legal-tenders  discouraged  their  presenta- 
tion for  gold,  except  when  it  was  wanted  for  interna- 
tional payments.  The  situation  was  indeed  neither 
dignified  for  the  government  nor  comfortable  for  the 
Treasury  officials;  but  without  the  aid  and  forbear- 
ance of  those  having  large  financial  resources  the 
situation  of  the  Treasury  would  have  become  unten- 
able at  any  moment. 

Under  this  complication  of  burdens  and  responsi- 
bilities, the  administration  resorted  to  a  succession 
of  bond  issues,  as  a  means  both  of  replenishing  its 
gold  holdings  and  of  meeting  its  deficit.  All  these 
loans  have  been  made  under  the  authority  of  the 
Resumption  Act  of  1875,  and  with  the  forms  of 
bonds  specified  in  that  measure.  As  a  mode  of 
complying  with  the  requirements  of  law,  the  admin- 
istration may  be  said  first  to  have  used  all  its  cash 
resources,  including  its  gold  holdings,  to  meet  the 
deficit  in  the  reserve  ;  and  thereupon  to  have  sold 
bonds  to  replenish  its  gold  holdings  and  maintain 
gold  payments.      Substantially,  the  bond   proceeds 

1  See  the  brief  statement  in  the  Report  of  the  Secretary  of  the  Treas- 
ury for  i8q5,  at  p.  lv.  It  was  at  this  time  that  the  Treasury  resorted 
to  the  bond-syndicate  loan  of  1895. 


POSTSCRIPT.  151 

have  been  used  for  the  double  purpose.  The  right 
to  borrow  in  this  way,  under  the  terms  of  the 
Resumption  Act,  has  never  been  seriously  disputed.1 
That  it  was  an  awkward  and  undesirable  means  of 
meeting  the  exigencies  of  the  case,  was  obvious. 
The  administration  repeatedly  asked  Congress  to 
authorize  other  and  more  straightforward  methods. 
But  nothing  could  be  got  from  Congress  ;  not  be- 
cause any  one  was  satisfied  with  the  existing  situa- 
tion, but  because  of  the  fundamental  difference  of 
opinion  on  the  question  whether  gold  should  be 
maintained  as  the  basis  of  the  currency.  So  long  as 
this  crucial  question  was  unsettled,  a  dead-lock  in  all 
monetary  legislation  was  unavoidable. 

With  the  details  of  the  bond  sales  and  their  man- 
agement we  are  not  here  concerned.  Perhaps  the 
management  was  not  always  perfect  ;  but  probably 
none  of  the  heated  critics  of  the  administration 
would  have  succeeded  better  had  they  attempted 
themselves  to  meet  the  extraordinary  difficulties  of 
the  case."  The  first  sale,  or  loan,  took  place  in  Feb- 
ruary, 1894,  of  fifty  millions  of  five  per  cent,  bonds. 
A  second,  of  the  same  amount,  came  in  November 
of  the  same  year ;  both  being  taken  by  the  banks  of 
New  York.  In  February  of  1895,  when  the  com- 
plete run  on  the  Treasury  was  going  on,  the  much- 
discussed  bond  syndicate  sale  took  place,  by  which 

1  The  doubts  expressed  above,  at  p.  88,  have  thus  not  stood  in  the 
way  of  bond  sales  under  the  Resumption  Act. 

s  On  the  bond-syndicate  sale  of  1895,  which  has  been  most  bitterly 
criticised,  see  an  excellent  article  by  Mr.  A.  1>.  \oyes,  in  the  Politi- 
cal Science  Quarterly  for  December,  1895. 


152  POSTSCRIPT. 

sixty-five  millions  of  gold  were  got  for  sixty-two 
millions  of  four  per  cent,  bonds.  In  February  of 
1896,  still  another  loan  was  made,  this  time  by  the 
issue  of  one  hundred  millions  of  bonds  through  gen- 
eral subscription.  In  all  of  these  transactions  it  was 
stipulated  that  the  bonds  should  be  paid  for  in  gold  ; 
but  in  all  of  them  (except  the  bond-syndicate  loan 
1895)  more  or  less  of  the  gold  paid  in  had  been  pro- 
cured from  the  Treasury  by  the  presentation  of  its 
own  notes  for  redemption. 

One  further  aspect  of  the  situation  now  needs  to 
be  considered  :  the  accumulation  of  legal-tenders  in 
the  Treasury.  Legal-tender  notes  received  by  the 
government,  whether  in  payment  of  taxes  or  in  con- 
sequence of  their  redemption  in  gold,  become  available 
cash,  and  may  be  re-issued  in  ordinary  disbursements. 
But  they  must  not  necessarily  be  re-issued.  They 
may  not  indeed  be  destroyed  :  but  they  may  be 
hoarded  and  stowed  away.  Whatever  amounts  are 
held  by  the  Treasury  diminish  by  so  much  the 
volume  in  circulation.  We  have  seen  that  in  1884- 
85,  when  there  was  danger  from  the  redundancy  of 
the  silver  currency  of  that  time,  Secretary  Manning 
hoarded,  and  so  put  out  of  harm's  way,  a  great 
quantity  of  silver  dollars  and  certificates.1  He  was 
fortunate  at  that  time  in  having  a  large  surplus,  and 
so  was  able  to  carry  out  his  policy,  with  little  overt 
difficulty,  by  simply  ceasing  to  pay  off  the  public 
debt.  His  successors  in  1894-96  were  less  fortunate. 
They  had  to  borrow  largely  and  heavily,  at  times 
under  hard  terms,  to  achieve  the  same  result.     The 

1  See  above,  Part  T.,  section  iv.,  especially  p.  32. 


POSTSCRIPT.  153 

proceeds  of  the  bond  sales  were  used  not  only  to 
meet  the  deficit,  but  to  gather  in  a  large  quantity  of 
the  redundant  government  issues.  The  operation 
was  carried  out  on  even  a  greater  scale  than  in  the 
earlier  period.  The  accumulation  began  in  1894:  by 
the  close  of  August  of  that  year,  over  fifty  millions 
of  legal-tender  notes  were  in  the  Treasury  cash.  In 
May,  1895,  the  amount  had  risen  to  84  millions; 
it  soon  arose  to  100  millions,  and  through  the  greater 
part  of  1895  and  the  first  half  of  1896,  ranged 
steadily  over  100  millions.  In  June,  1896,  it  was 
over  120  millions.  Silver  certificates,  though  not 
always  easy  to  manage,  were  not  accumulated  in 
any  noticeable  proportions.  Being  in  smaller  de- 
nominations, they  remained  more  steadily  in  cir- 
culation. It  was  the  legal  tenders, — partly  of  the 
old  issue,  partly  Treasury  notes  of  1890, — which  were 
accumulated  in  these  extraordinary  quantities.  And 
notwithstanding  this  removal  from  active  use  of  such 
an  enormous  mass  of  paper,  which  must  have  come 
in  the  first  instance  out  of  bank  holdings,  the 
reserves  of  the  banks  showed  no  tendency  to  shrink. 
They  remained  at  figures  which  brought  an  easy 
money  market  :  a  fact  which  shows  how  greatly  the 
total  government  issues  had  come  to  exceed  the 
needs  of  the  community  for  the  shrunken  transac- 
tions of  the  period  of  depression. 


So  the  situation  stands.  It  is  unbearable,  and 
cannot  endure.  The  large  mass  of  government 
paper  and   silver  money,  even   though   in   time   the 


154  POSTSCRIPT. 

country's  advance  in  wealth  may  make  it  less 
obviously  redundant,  must  remain  full  of  dangers 
and  temptations.  The  Treasury  is  exposed  to  great 
irregularities  in  its  receipts,  and  to  a  haphazard  sys- 
tem of  appropriations  and  expenses.  It  is  oppressed 
in  one  year  with  an  unmanageable  surplus,  and  in 
another  with  an  equally  unmanageable  deficit  ;  yet 
is  able  to  borrow  anew,  or  to  pay  off  debts  of  old, 
only  under  legislation  devised  a  generation  ago  to 
meet  very  different  conditions  ;  and  is  charged,  never- 
theless, with  the  duty  of  maintaining  at  par  with  gold 
a  thousand  millions  of  fiduciary  money.'  Sooner  or 
later,  this  absurd  system  must  be  replaced  by  some- 
thing better  :  either  by  a  Treasury  equipped  in  some 
way  to  meet  its  responsibilities,  or — far  better — by 
relieving  it  of  the  monetary  responsibilities  which 
have  been  imprudently  put  upon  it.  But  before  this 
task  can  be  taken  in  hand,  the  question  as  to  the 
basis  of  the  entire  monetary  system  must  be  settled. 
It  is  the  struggle  on  that  point  which  has  brought 
about  the  present  position  of  unstable  equilibrium. 
Every  endeavor  to  improve  the  Treasury's  financial 

1  On  June   I,  1896,  the  total  amount  of  the  several  issues  directly 
depending  on  the  Treasury  was  : 

United  States  notes  ! 346-7  millions. 

Treasury  notes  of  1890 i3T-4 

Silver  dollars  and  certificates 429.3 

Subsidiary  silver 77 -° 

984.4  millions. 
To  this  should  be  added  the  225  millions  of  National  Bank  notes, 
whose  value  must  follow  that  of  the  issues  directly  dependent  on  the 
Treasury. 


POSTSCRIPT.  155 

resources,  or  to  relieve  it  of  some  of  its  monetary 
functions,  has  been  blocked  by  the  preliminary 
struggle  whether  gold  or  silver  should  be  the  bans 
of  the  circulating  medium.  It  is  well  that  this  ques- 
tion should  be  squarely  presented  for  decision.  Only 
when  it  has  been  disposed  of,  can  the  country  pro- 
ceed to  the  much-needed  reorganization  of  its  currency 
legislation.  The  compromises  of  1 878  and  1 890, 
like  most  compromises,  in  the  end  availed  nothing. 
They  complicated  the  situation  enormously,  and 
made  the  inevitable  readjustment  much  more  diffi- 
cult ;  they  did  not  abate  by  a  jot  the  demands  of 
the  silver  advocates ;  they  served  only  to  postpone 
the  day  of  settlement.  The  time  for  a  definitive 
decision  on  the  fundamental  question  had  to  come. 

On  that  question,  it  is  difficult  to  see  how  any 
well-informed  and  unprejudiced  person  can  waver  in 
his  answer.  As  to  the  indefinite  maintenance  of  the 
single  gold  standard  by  all  civilized  countries,  there 
may  indeed  be  reasonable  differences  of  opinion. 
The  proposal  for  international  bimetallism  is  sup- 
ported by  some  strong  arguments,  and  advocated  by 
many  eminent  economists.  But  the  proposal  that 
the  United  States  alone  should  coin  silver  freely  at 
the  ratio  of  16  to  I  can  not  be  considered  as  any- 
thing but  a  proposal  to  debase  the  currency,  and  in 
that  sense  as  a  proposal  for  dishonesty.  The  fact 
that  the  effects  of  the  measure,  if  it  were  enacted, 
would  be  less  simple  and  direct  than  is  popularly 
supposed  ;  the  slowness  with  which  general  prices 
would  respond  to  the  change  in  the  basis  of  the  cir- 
culating medium  ;    the  irregular  rate  at  which  the 


156  POSTSCRIPT. 

prices  of  different  commodities  would  be  affected  ; 
the  whole  series  of  interwoven  factors  which,  as  the 
preceding  pages  have  shown,  encircle  the  monetary 
systems  of  a  great  credit-using  country  like  the 
United  States, — these  complications  do  not,  after 
all,  obscure  the  fact  that  the  free  coinage  of  silver 
would  mean  at  the  outset  debasement  and  deprecia- 
tion, and  in  the  end  an  unstable  and  untrustworthy 
basis  for  the  currency.  It  is  sometimes  suggested 
that  it  would  so  raise  the  market  price  of  silver  as  to 
make  the  silver  dollar  intrinsically  equal  to  the  gold 
dollar,  and  thus  secure  the  concurrent  circulation  of 
the  two  metals.  But  those  who  make  the  suggestion 
can  not  have  real  faith  in  it.  If  it  was  in  high  de- 
gree doubtful  three  or  four  years  ago  whether  gold 
payments  could  be  maintained  for  a  brief  space  after 
the  free  coinage  of  silver,'  it  can  be  now  the  subject 
of  no  doubt  whatever.  The  shattering  of  the  Treas- 
ury's position,  the  long-continued  uneasiness  as  to 
the  maintenance  of  gold  payments  even  under  exist- 
ing conditions,  make  it  as  certain  as  anything  can  be 
in  economic  prediction  that  a  free  coinage  victory  at 
the  polls  would  lead  to  an  immediate  suspension  of 
gold  payments  by  the  Treasury,  and  the  immediate 
entrance  on  the  road  to  a  silver  basis.  As  the  heavy 
purchases  under  the  silver  act  of  1890  proved  of  no 
avail  in  raising  the  price  of  that  metal,  so  its  free 
coinage  would  not.  The  question  is  squarely  one 
between  gold,  and  silver  at  fifty  cents  in  terms  of 
gold.  Whatever  sympathy  one  may  have  with 
those  classes  and  sections  which  labor  under  real 
1  See  above,  pp.  92-94. 


POSTSCRIPT.  157 

economic  difficulties,  and  whatever  respect  one  may 
have  for  the  good  faith  and  honest  intentions  of 
many  who  advocate  the  change,  the  safe,  stable,  and 
expedient,  and  in  that  sense  the  right,  conduct  of 
the  nation's  affairs  demands  the  maintenance  of  the 
gold  standard  and  the  emphatic  rejection  of  the 
silver  proposal. 


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